Legal and institutional determinants of factoring in SMEs: Empirical analysis across 25 European countries

We use a survey data set of 4348 SMEs from 25 European countries to analyze the association between the use of factoring as a form of SME financing and the legal environment of the country where in which they operate. Our findings indicate that firms operating in countries with legal environments that weakly protect the rights of creditors, such as those under French-civil-law, with political instability or high enforcement costs, are more likely to use factoring. We hypothesize that in such environments bank financing could be more restricted and factoring might be an alternative source to alleviate SMEs financing constraints. In line with this argument, we find that firms experiencing some financing difficulties are more likely to use factoring. We also show that the likelihood of using factoring increases for firms located in growing economies. Factoring might be a means for these firms to finance the enlargement of their business activity. (Ginés Hernández-Cánovas acknowledges financial support by Fundación Séneca (Project 15403/PHCS/10), and by Ministerio de Ciencia e Innovación (Project ECO2011-29080)