Factoring as a Financing Option: Evidence from the UK

Abstract

This paper develops and tests hypotheses that explain the choice of factoring as a financing source and the type of businesses using it in the UK. The tests focus on establishing a profile of borrowers, based on firm's demographic characteristics such as age, turnover, industry, and type of legal ownership. In addition to that we extend the analysis to test whether there exist any association between the use of factoring and the availability of credit to firms, the collateral requirements by banks and its value, the value of the firm's debt, and also whether the business is experiencing financial difficulties. The analysis refers to a survey of 3805 companies of which 212 were using factoring services. We find evidence that each is an important determinant in firms' choice of factoring as a source of finance for working capital and an instrument to cash flow improvement but it is a financial option that is not universally available.

Key words: Factoring, Invoice financing, Working capital, Finance gaps

JEL Classification: G32, G29