Treasury Management Internation Logo
Trade Finance
Published  18 MIN READ
Please note: this article is over 9 years old. If you feel this article is inaccurate or contains errors get in touch here. Many thanks, TMI

The Hidden Player: Sizing the Invoice Finance Market

Research Report, Demica, April 2012

The rise of invoice finance

Interest is steadily growing in financing products outside of traditional bank credit, not least from banks seeking to provide their clients with funding that does not require them to set aside the increasingly punishing levels of reserve capital demanded by local regulators and looming internationally in the form of Basel III. From the corporate perspective, lending volumes in Europe have fallen as banks look to clean up their balance sheets in the quest for more effective capital adequacy management [1]. In a world of suppressed liquidity, companies have been eating into their own cash reserves [2], but this cannot go on for ever and alternative lines of finance are required to fund economic recovery. This is especially the case with highly leveraged firms facing refinancing renewals, who are finding that spreads have widened so considerably that affordable finance is simply not available through traditional products and channels [3]. One UK commentator has identified a £191bn ‘credit hole’ in business lending in their country [4]. Similarly, in the same country, a recent government-commissioned report into non-bank lending has highlighted the growing need for more diverse sources of finance [5].

In a world of suppressed liquidity, companies have been eating into their own cash reserves, but this cannot go on for ever and alternative lines of finance are required to fund economic recovery.

Since the financial markets crisis of 2008, attention has been turning to a number of alternative approaches, including various forms of finance based on trade receivables [6]. According to one Dutch commercial bank, “Banks’ risk departments are more keen to get loans collateralised. This of course is good news for receivables finance as risk departments see this as an excellent risk mitigator. And this push towards receivables finance is supported by pressure from outside the banks. For example, in Holland the finance ministry and others who see themselves as stakeholders in the success of SMEs are taking a keen interest in receivables finance whilst CEOs of businesses in structured finance and leveraged deals are looking to see an asset based lending product to be included as part of the deal.”

How, then, to quantify the level to which corporates are taking up invoice-based financing? The various forms of invoice finance have, up to now, tended to be viewed and analysed in isolation from one another. The result is that their collective significance tends to be under-estimated by financiers, and their collective advantages under-recognised by corporates in search of imaginative financing solutions. This research report collates data on all the different forms of invoice-based finance in order to understand the size and growing significance of this segment of the commercial finance world. The report has also interviewed a selection of leading banks from around Europe about their views on this developing marketplace, and selected comments from these interviewees are included within the report’s text.