The factoring portfolio in Lithuania and Estonia exceeds Latvia's indicators

  • 2022-06-07
  • Hipp Gustavson, Head of EasyFS Core Banking at Tietoevry

The Covid-19 pandemic has had serious consequences in all sectors that will be persistent for a long time to come. As a result of the restrictions, the demand from customers decreased for some companies, and their need for factoring services decreased accordingly. Although Latvia's factoring portfolio has long lagged behind its neighbours, and despite 2020 being the busiest period of the pandemic, for the first time in 11 years, the factoring turnover declined across the European Union. In 2020, the total indicative factoring portfolio in the Baltic States was 826.3 million euros - 322 million euros in Estonia, 367 million euros in Lithuania and only 137 million euros in Latvia.

Factoring & GDP

During 2020, the total factoring turnover in Estonia decreased by 26%, in Latvia by 4% and in Lithuania by 24%. Changes in total factoring turnover often correspond to the dynamics of GDP. If sales increase, there is a need for transactions financing to balance companies operational cash flows. However, in 2020, invoice financing and factoring in Estonia Estonia declined much faster than GDP (GDP in Estonia decreased by 3%), while in Lithuania and Latvia GDP even increased by 1% and 4%.

Lithuania - the largest market, Estonia - the fastest growing

Factoring is a type of working capital used by companies in various industries. It is often used by wholesalers or manufacturers who have a wide range of customers and who face payments with a long payment period of 30, 60, 90 or even 120 days. Not only the impact of the pandemic on factoring is worth considering, but also the significant differences between the Baltic States - despite the fact that the factoring portfolio in Lithuania decreased to 367 million euros (-27% compared to 2019), it is still the largest regional factoring market in the Baltics. In turn, Estonian factoring turnover and total portfolio growth from 2010 to 2018 have been the fastest growing in the Baltics. Due to the pandemic, Estonia's factoring portfolio decreased to 322.3 million euros in 2020 (-15% compared to 2019). By the end of 2020, Latvia's factoring portfolio decreased to 137 million euros (-15% compared to 2019).

Different number of market players

Looking more closely at the situation in Latvia, it can be concluded that the highest point of the factoring portfolio was in 2008, when it reached 303 million euros (the lowest point in 2010 was 64 million euros, which can be explained by the recession of the Latvian economy as a result of the global financial crisis). In 2020, the Latvian factoring portfolio reached 137 million euros and the factoring market was dominated by Swedbank (61.1 million euros), SEB (40.9 million euros) and Luminor (27.6 million euros), while the rest of the market share consisted of 12 relatively smaller companies. By comparison, the Estonian market is dominated by four large players and more than 20 smaller companies, while in Lithuania it is dominated by six large factoring providers and about 10 small ones.

Economic activity recovered faster than expected

However, the indicators of the first three quarters of 2021 show that the factoring market is recovering - analysts have emphasized that credit insurers have adapted to the pandemic and its risks and are better able to differentiate risks between sectors. This is also confirmed by the figures - in the 3rd quarter of 2021, the factoring turnover in Estonia was 917 million euros, but in Lithuania - 828 million euros. After a year-long decline, economic activity recovered faster than expected. Although Latvia's indicators are approaching those of neighbouring countries, it is important to explain the importance of factoring and to inform about all the benefits it provides. In the post-pandemic period, when many companies are recovering, factoring contributes to the stability of additional financial flows and helps to discipline recipients of goods and services. In a situation where making long-term forecasts and assessing all risks can be a challenge, factoring is an appropriate financial tool to plan and continue operations in the long term. As trade volumes increase, so does the need for financing, and factoring allows the adequacy of financial flows to be maintained.