I hope this article finds you and your families well and safe during the current COVID-19 pandemic. As I am sure is the case with many of you, the COVID-19 pandemic that has ravaged the global economy seems to be abating in the EU and the United States and this is finally some good news. The significant number of lives lost is truly tragic and we need to be eternally grateful to the medical community and all front line heroes who have worked tirelessly and without a moment’s hesitation to serve in these unprecedented times. Thank you.
There can be no debate that COVID-19 has been an economic tragedy but more importantly a human one. Predictions are all over the map as to when the economies of the EU and in the United States can get back to “normal” and there is some debating what a new normal will even look like. I think we also need to consider that while almost all of the economy is either shut down or badly dented, there are actually some parts of the economy that are functioning even in this period of turmoil. Just think about how we have all [or most of us] had to very quickly adapt the way we work and manage our businesses, organizations and institutions in just the last month or so. I believe that our economic rebound will come, and it will be led by firms and individuals that are astute enough to see and capitalize on these emerging trends and new business opportunities. As the same time, there will be economic casualties including those who refuse or will not acknowledge that we are never going back to the “good old days of the ways we used to do things.”
This got me to thinking about the ramifications of the changes COVID-19 will cause related to factoring in the EU and on a global basis. Unlike the case here in the United States, factoring plays a “front and center” role in the SME capital markets in the EU and the UK. The effective penetration rate of the factoring industry in the United States is a fraction of 1% utilizing the following definition; total $ volume of factoring clients in the total number of SMEs in the United States.
Given the significant size and importance of factoring as a mainstream source of SME capital in the EU, I decided to research two major concepts in this article:
- The total number of SMEs in the EU by key industries and then
- Look at just published McKinsey research on specific industries in the EU and how they have been impacted by the current COVID-19 pandemic.
After looking at these two metrics, we can perhaps then see which industries that currently use factoring might be ones to every shy away from or more importantly assertively seek to add new clients in.
The Significant Role SMEs play in the EU Economy
As is the case in the United States, the importance of a vibrant and growing SME sector in the EU economic environment cannot be overstated. Based on data compiled by the World Bank [published in 2018, research conducted in 2015 and later], SMEs in 2015 that had less than 250 persons represented 99% of all of the business enterprises in the EU. While this data may be a bit dated, the magnitude and importance of SMEs has not materially changed since then. In addition the same data from the World Bank documented that in 2015, SMEs that employed fewer than 250 persons employed were independent, or not part of a larger franchise or multinational firm ownership comprised the vast majority of SMEs in the EU.
SMEs have been for decades one of the most important keys to adding to economic growth, innovation, job creation, and social integration in the EU. However, in official statistics the World Bank pointed out that “SMEs can currently only be identified by employment size as enterprises with fewer than 250 persons employed. This is a big category and encompasses enterprises with different ownership structures and varying numbers of employees and levels of economic activity.” There is some additional data now on a better breakdown of these SMES by looking at microdata including structural business statistics, international trade in goods statistics, business demography and business registers (BRs). For purposes of this article we will not use this data as it was only available in 12 of the EU countries and as a result, incomplete.
As noted above, SMEs that employ less than 250 represent around 99 % of all enterprises. Almost all (94%) of these SMEs are defined as “independent” by the World Bank; in that they are neither controlled by another SME nor control themselves another SME. Conversely “dependent” SMEs defined as those that are controlled by another SME and/or control themselves another SME thus belong to a “group” are as noted by the World Bank important in terms of employment and turnover, especially in Denmark, Estonia, Latvia, Finland, Sweden and Norway. Therefore, a large proportion of total growth created by SMEs can be attributed to dependent enterprises. Some other perhaps esoteric facts about these SMEs are:
- 0.4 % of the enterprises that employ fewer than 250 persons belong to a group that employs 250 or more persons. Therefore, these enterprises are large enterprises according to the SME definition. They contribute significantly to employment and turnover, especially in Croatia, Finland and Sweden.
- 1.6% % of the enterprises were dependent enterprises belonging to an international group for which it was not possible to know the total number of persons employed by the group. These enterprises contribute highly in terms of employment and turnover especially in Estonia, Latvia, Netherlands, Portugal, and Romania.
For more and additional data, please go to the following link:
Some more recent data as published in November 2019 by Statista confirm this earlier data remains little changed in the period between 2015 and 2019. According to published data, there were 25.1 SMEs million in the EU in 2018, with the vast majority of these enterprises micro-sized firms which only employed fewer than nine people. A further 1.47 million SMEs were small firms with between 10 and 49 employees and approximately 236 thousand were medium-sized firms that had 50 to 249 employers.
Given this data we can clearly see that SMEs are a very important part of the EU economy but is also important to recognize that their value to each individual country in the EU varies widely. Two examples illustrate this point: in Malta 81 percent of value added to the economy comes from SMEs, while in the Republic of Ireland only 41.7 percent of the county’s added value comes from SMEs. For the European Union, the average value that SMEs contribute to the economy is around 56 percent. For the year 2017, SME’s in the EU employed over 94 million people, or approximately 66 percent of the workforce. In Europe’s biggest economy, Germany, SMEs employed 18.3 million people, with over 6.7 million people employed by small-sized enterprises alone.
Prior to looking at the largest industries in the EU, a bit of a recap of the scope of the EU utilizing Wikipedia data. The economy of the European Union is the joint economy of the member countries of the European Union (EU). It is the second largest economy in the world both in nominal terms (after the United States) and according to purchasing power parity or PPP. The European Union’s GDP was estimated to be $18.8 trillion in 2018, or about 22% of the global GDP.
In terms of specific industries in the EU, the services sector is by far the most important accounting for almost 75% of the total GPD of the EU. The manufacturing industry adds only 24% of total GDP and agriculture an additional very small 1. 5% of GDP.
It is important to also note that tourism is a significant part of the economy in the EU, and that France is the world’s number one tourist destination for international visitors, followed by Spain, Italy, and Germany. It is worth noting, however, that a significant proportion of international visitors to EU countries are from other member states. This fact is important to remember especially in light of the near complete shutdown of the EU during the current COVID-19 crisis.
So where are the greatest potential job losses to occur in the EU due to the COVID-19 crisis?
It is clear that SMEs in the EU have and will most likely bear the brunt of job losses, financial stress and potential elevated failure rates due to the current COVID crisis? Why? The answer lies in the fact that the overwhelming majority of all business in the EU are SMEs and many are in a couple of industries most impacted by the virus. In order to accurately determine the ones most affected, I believe the first research that needed to be completed was to look at the most common industries that factoring firms across the EU provide AR funding in, and the effective penetration rates of factoring to GDP in the EU.
As I already mentioned, the effective penetration rates for the factoring in a country like the United States are tiny, both on a current and historical basis. According to my calculation, the effective penetration for United States factoring in 2019 hovers around a fraction of 1% of the total GDP. Factoring volume in the United States totaled about $100 Billion in 2019 and the GDP of the country in the same year was about $21.5 Trillion. So 1% of $21.5 Trillion would be $215 Billion; so $100 is about ½ of 1%.
In many EU countries, the effective penetration rates for factoring is impressive and quite a contrast to the United States. A recent [January 2016] White Paper published by the EU Federation on Factoring and Commercial Finance “EUF” has a wealth of very interesting and detailed data on the scope, size, and overall industry of factoring in the EU. I found it very helpful and most of the data below comes directly from the White Paper.
For those not aware, the EUF is the Representative Body for the Factoring and Commercial Finance Industry in the European Union (EU). It comprises fourteen national industry associations (representing fifteen countries) that are active in the region, together with the recently combined Factors Chain International and International Factors Group. Its members account for around 97% of the EU Industry turnover.
The EUF seeks to engage with Government, regulators and legislators to enhance the availability of finance to business, with a particular emphasis on the SME community, as businesses in this sector are the heartland of growth. The EUF acts as a platform between the Factoring and Commercial Finance Industry and key legislative decision makers across Europe bringing together national experts to speak with one voice. Its aim is to provide these bodies with vital industry information to inform, influence and assist with the direction of existing and future finance legislation. It seeks to ensure the continued provision of prudent, well-structured and reasonably priced finance to businesses across the EU.
One of the myriad of reasons I think factoring should be somewhat concerned about the repercussions of COVID-19 and what the economies of the EU members will look like post COVID-19 is the fact that factoring is a much more commonly used form of funding in the EU for SMEs than in the United States. This fact speaks to the professionalism and integrity of the factoring industry in the EU, but also makes the industry collectively at greater risk if/when a significant economic downturn comes impacting all firms but most negatively SMEs.
The following table from the EUF Whitepaper, although slightly dated presents data on the factoring volumes and the resulting effective factoring penetration rates by EU member. It also provides data on the growth by member country.
The importance of the factoring industry and their role in funding SMEs becomes even clearer when we look at the countries with the largest economies and factoring volume in the data below. It is again impressive that factoring has achieved these effective penetration rates to GDP as follows:
- UK, 15.81%
- France, 10.58%
- Germany, 6.54%
- Italy, 11.32%
- Spain, 10.67%
- Netherlands. 8.78%
When one quickly scans this list and considers the human and financial destruction due to the COVID-19 virus in countries like Italy, Spain, the UK and others, it is easy to see why SMEs and as a result the factoring firms that provide them capital should be very concerned about a post COVID period of economic malaise.
Finally, the average penetration rate for all EU factoring members is slightly below 10% of total EU GDP.