In the factoring market, Latvia lags significantly behind its Baltic neighbors :: Dienas Bizness

In a situation where in Europe and even in Estonia and Lithuania, producers of goods receive payment for delivered goods faster through factoring services, in Latvia only a small part of them use this financial service, thus many small and medium-sized enterprises are struggling with working capital shortages.

This is told in an interview with Dienas Bizness by a Baltic company, a reverse factoring service provider SupplierPlus Bruno Puriņš, Head of Sales in Latvia.

He points out that factoring and reverse factoring are a form of working capital lending using the debt of the purchaser of the goods as a guarantor. Factoring services are used by a large number of companies abroad, thus allowing the money they have not yet received (frozen) to be used for business development and thus to deal with working capital issues, especially now that the prices of many goods and services are rising.

What is the current situation in the factoring segment?

In Latvia, factoring has never been the most popular source of covering the shortfall in working capital. That is why Latvia lags far behind the Baltic neighbors Lithuania and Estonia in terms of factoring. For comparison, the total factoring turnover in Latvia in 2020 was 815 million. EUR 3,900 million in Estonia. euros, but in Lithuania – 2700 mln. euro. Thus, in Latvia it is more than 4.8 times less than in Estonia and 3.3 times less than in Lithuania. It is undeniable that each of the Baltic states has different economic fundamentals, but I doubt that the Estonian economy is close to or 5 times larger than in Latvia. In general, factoring services are actively used in Europe and are much larger than in the Baltics. An extended invoice payment period of 90 or even 180 days means a shortage of working capital for suppliers of goods, including the purchase of raw materials for production (especially in a situation where their prices continue to rise) and outsourcing, as well as the payment of taxes.

Why is there so little factoring in Latvia compared to neighboring countries?

Historically, the shortage of working capital in Latvia is most often compensated by a working capital credit line in commercial banks, although the same banks also provide a factoring service. It should be noted here that the traditional factoring service is possible only in situations when it is accepted by both parties to the transaction – both the supplier and the buyer of the goods or services. One of the most important cornerstones of factoring is the trust of the financial sector in the business environment and the knowledge and desire of entrepreneurs to develop their business through factoring services. In Latvia, the banking sector has historically experienced many shocks – Banka Baltija, Parex, Krājbanka, ABLV, PNB. Together, they have left their mark on risk assessments, some of which have forced us to analyze corporate credit risks more thoroughly, while others have led us to be at the forefront of AML supervision in Europe.

Read the full interview May 24 in the magazine Dienas Bizness!

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