Gastbeitrag: Mark S. Mandula, Leiter Marketing United Capital Funding

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.

Source: EUF ESC Committee, EUF Members, IFG, FCIFactoring and Commercial Finance A Whitepaper The EU Federation for the Factoring and Commercial Finance Industry January 2016.


Now that we have established the significant penetration rate of factoring in the EU, and that 99% of the businesses in the EU are SMEs, the next data metric that needs to be looked at is this: are there specific industries and size SMEs that factoring appeals to and is used in the EU than others? If so, what are they are and are these the same/opposite ones more severally impacted so far [and post COVID-19] in the EU?


Again, the previously referenced Survey and resulting White Paper does an excellent job of addressing these questions as part of their research. One key part of their research was to ask EU factoring firms to allocate their AF factoring portfolio into industry segments, including the following:

  • Manufacturing
  • Distribution
  • Services
  • Transportation
  • Retail
  • Construction


Their research actually gathered research from three different perspectives [# of clients, turnover and % of total advances]. I read through it all and thought that the % of advance data made the most sense for this analysis and there was not a significant difference in the results of the three data sets.portant in the recent memory than now.

Source: EUF ESC Committee, EUF Members, IFG, FCIFactoring and Commercial Finance A Whitepaper The EU Federation for the Factoring and Commercial Finance Industry January 2016.


The key findings of this research are that there are three key industry sectors where factoring firms in the EU have the highest volume of funding provided as of the date of the Survey. These are manufacturing, services and distribution. These findings as noted by the report “reinforce and clearly confirm that factoring is a vehicle for funding of the real economy providing financing support in key productive sectors of European industry”.


So the final data set that needs to be looked at now that we understand effective factoring penetration rates and industry segments serve are the actual size of the firms that utilize factoring in the EU as a source of working capital. The Survey also provides research on this and it asked EU factoring firms the following: What is the profile of the user group? The methodology they used was to ask respondents to provide data regarding the numbers, sizes, turnovers and advances.


Respondents were asked to report client numbers, their turnover and the advances by the categories of:

  • Small Business defined (using EU Criteria) as a business with turnover less than €10M per annum,
  • Medium with turnover between €10M and €50M, and
  • Large with turnover >€50M
  • Other


The question was posed from three perspectives:

  • What proportion numerically of clients are there in each size band?
  • What proportion of client turnover vests in each size band?
  • What proportion of advances (utilization of funding) does each band represent?


Perhaps not surprisingly, the data confirmed traditional thinking about who the clients really are and use factoring to fund and growth their businesses in the EU; namely SMEs. The Survey concluded that SMEs represented 76% of number of clients in the EU factoring industry and only 11% were Medium sized businesses. Another 13% were classified as large. This data confirms that more than ¾ of all clients served by EO are small as a group use this form of working capital for many reasons versus more traditional sources.


Finally, one unexpected finding of this area of research was that in terms of turnover, even though large firms accounted for a small % of the total client census, the volume of funding for this group was about the same as the small and medium sized firms combined. The underscores that there must be a wide array of many small SMEs that rely on factoring as the primary source of working capital in the EU, and that the fact that large firms are most likely to be clients of large bank group owned factoring firms who can provide them significantly higher credit limits and other services they need.


McKinsey & Co. Research on the Impact of COVID-19 on EU Businesses


The prior amount of significant data from a variety of sources leads us to a point where we can make several statements about factoring in the EU:

  • Factoring plays a very important and highly regarded role in funding companies of all sizes in the EU.
  • The lion’s share of factoring clients are SMEs.
  • The key industry sectors that factors provide capital to are manufacturing, distribution and service firms.
  • Factoring has achieved significant penetration rates relative to GDP in almost every single EU member, especially France, Italy, the UK and Spain.


Now we need to do some final research and examine recently published data by McKinsey & Co. that should be required reading for business owners, policy makers to fully understand the scope and depth of the economic havoc COVID-19 has already done, and for the near and perhaps long term in the EU.


The McKinsey & Co. Public Sector Practice Research document is brilliant in communicating the hard facts about the impact [primarily on SMEs] COVID-19 could have and for all in the factoring industry it should cause a very heightened awareness of the risks about doing business in the SME space. There cannot be any debate that SMEs are potentially for a very rough road ahead.


Their report is entitled “ Safeguarding Europe’s livelihoods; Mitigating the employment impact of COVID-19” and was authored by David Chinn, a senior partner in McKinsey’s London office; Julia Klier a partner in the Munich office and where Sahil Tesfu is an associate partner; and Sebastian Sternis, a senior partner in the Hamburg office. The preface of this thorough research reads as follows:


“The COVID-19 pandemic has put tens of millions of jobs at risk across Europe, with potentially far-reaching economic and social consequences. Business leaders and policy makers across the continent have already begun to take decisive action to mitigate this risk — but much remains to be done. Paying close attention to the industries, occupations, and demographics most at risk can help Europe’s decision makers shape responses that are targeted and rapid. Armed with a keen understanding of the challenge, they can take bold, innovative action to safeguard jobs—now and in the future.”
Copyright © 2020 McKinsey & Company. All rights reserved.


The McKinsey & Co. report makes the case that nearly 60 million European jobs are at risk due to the COVID-19 pandemic. It believes that the sharp rise in benefit filings might just be the tip of the iceberg. They estimate that up to nearly 59 million jobs (26 percent of total employment) across Europe are potentially at risk of reductions in hours or pay, temporary furloughs, or permanent layoffs. To determine this they sorted occupation in Europe into three specific categories:


  • Low-risk occupations include 160.5 million workers who either do not work in close proximity to others (such as accountants, architects, and journalists) or whose work provides essential health services (such as physicians, ambulance drivers, and health service managers) or other essential services (such as those in police work, food production, education, public transit, water, and utilities).
  • Medium-risk occupations include 14.7 million workers who perform their work in close proximity to others but do not interact with the general public; this includes machine operators, construction workers, and psychologists.
  • High-risk occupations include 54.8 million workers, most of whom work in close proximity to others and have significant exposure to the general public; they include retail cashiers, cooks, and actors.


The breakdown of jobs at risk by job cluster in the table reproduced from their research shows that 50 percent of all jobs at risk in Europe come from customer service and sales (25 percent), food services (13 percent), and building occupations (12 percent); production work (9 percent), office support (8 percent), and community services (8 percent) make up another 25 percent. The McKinsey & Co. data indicates that the less affected are workers in the health, science, technology, engineering, mathematics, business, and legal professions; educators; and trainers.

Their research then analyzed the results by industry sector, we find that certain ones are particularly at risk; please refer to the Table reproduced from their article. Jobs at risk represent 74 percent of total sector employment in the accommodation and food sector, 50 percent in the arts and entertainment sector, and 44 percent in the wholesale and retail sector. Wholesale and retail represent around 14.6 million jobs at risk (25 percent of total jobs at risk) and accommodation and food around 8.4 million (14 percent); manufacturing and construction also see substantial numbers of jobs at risk.

However, they concluded that other sectors are much less affected, such as professional services (1.6 million), finance and insurance (1.2 million), information and communication (0.6 million), agriculture (0.4 million), and real estate (0.3 million).


Their research also analyzed the job loss potential of firms in the EU by also providing a great deal of data on how the level of education [or lack of same] on an industry by industry basis. Their research then presented a series of steps and initiatives companies and governments could take now and in the near future to protect the jobs at risk in the EU.


The several paragraphs of the McKinsey & Co. research that I believe should serve as a catalyst for the factoring business to be careful for the near term when making about decisions to add additional clients and when they critically assess their current SMEs portfolio was follows:


“Crucially, employment in small and medium-size enterprises (SMEs), or those with fewer than 250 employees, which accounted for more than €4.3 trillion in value added in the EU-27 plus the United Kingdom in 2019, is particularly at risk. At least two of three jobs at risk are in an SME, and more than 30 percent of all jobs at risk are found within microenterprises consisting of nine employees or fewer.16 This includes 70 percent of SME jobs at risk in the accommodation and food sector, 56 percent in the wholesale and retail sector, 75 percent in the real-estate sector, 76 percent in the construction sector, and 68 percent in the professional service sector. The high share of SME jobs at risk is particularly worrisome, given that these jobs may be harder to recover in the long term should they not be protected through the crisis.”


The risk to jobs in small enterprises is further increased by the fact that in 2016, only 56 percent of all companies with 50 or fewer employees provided remote access to email, applications, and documents for their employees, compared with 93 percent of all companies with more than 250 employees.


Summary and Conclusion


The purpose and goal of this article was to determine if there were any specific industries that utilize factoring as a working capital for funding their SMEs are more at risk than others, due to the current COVID-19 pandemic in the EU. I believe that the research presented in the following areas leads me a clear answer presented below:


  • The significant role SMEs play in the EU economy
  • Where are greatest potential job losses could occur in the EU due to COVID-19 and
  • Timely McKinsey & Co. research on the impact of businesses in the EU


The conclusion that I have drawn from all of the data and research is that while there are clearly some industries that have significantly higher risks than others, every single business regardless of industry, location, country or size will be impacted and feel the wrath of the COVID-19 pandemic. It would be a huge mistake to believe any firm is immune to the rapidly changing and unprecedented impacts of the current COVID crisis and even perhaps an even more disruptive COVID 2.0 if it were to reappear.


However, within the universe of all businesses in the EU that will feel the pain of COVID-19, I also think based on the composition of firms served by factors [primarily small], the industries where factors have traditionally served in [manufacturing, services and distribution], and the results of the comprehensive McKinsey research, I would suggest these are the specific industries that pose the greatest risk to the factoring industry in the EU;


  • Any firms that either are in, supply to or have as clients travel related businesses. This list would include, but not be limited to hotel, motels, resorts, airlines, cruises, transportation restaurants and the like.
  • Firms in, supply to our have as clients those in the Arts and entertainment industries. Businesses like movie theaters, etc. where crowds used to gather. This could also include sporting events and other forms of entertainment.
  • Retail and wholesale firms, especially the second and third level of these firms and those that are in, sell to, supply to or have no “stand out qualities” or niche focus.
  • Construction, especially subcontractor and suppliers in the industry.
  • Real Estate in all forms.
  • Oil and related natural mineral resource firms, suppliers other who transport and market these products.
  • Manufacturing, although to a lesser degree.


Unfortunately that includes just about all industries! I do believe some industries could emerge less scathed and without significantly higher risks to a factoring firm. Not surprisingly I believe STEM, technology, IT, finance, insurance, professional services and others. However these have rarely been “core” industries for factoring firms in the EU and elsewhere so the list of winners might not be as practical industries in the near future.


Regardless of the industry, this is a watershed moment for all SMEs and the factoring firms that serve them, and the need to be as careful, conservative and vigilant has never been more important in the recent memory than now.


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