Geopolitical shocks push Latvian firms toward purchase factoring
Turmoil near the Strait of Hormuz and in Israel is disrupting supply chains for Latvian companies, prompting more of them to turn to purchase factoring to cover working capital gaps. Awareness of the tool has also grown significantly among local businesses.
Recent geopolitical events, including tension in the Strait of Hormuz and the conflict in Israel, have created serious problems for Latvian companies whose goods get stuck mid-transport. When a ship cannot reach its destination, the cargo technically already belongs to the buyer, yet remains physically inaccessible. This leaves companies in a difficult position: they cannot claim damages from the seller, while facing possible penalties from their own clients over delayed deliveries.
To avoid halting operations, businesses often must urgently source replacement supplies, typically at higher prices on the European market, which requires extra working capital. One solution is purchase factoring, a hybrid financing model in which a factoring company pays the supplier's invoice directly while the buyer receives a payment term of up to 90 days. This mechanism has recently helped several companies operating in the Israeli market — including one that had to switch from sea freight to costlier air transport to meet delivery deadlines for national armed forces, and another that had to find new raw material suppliers requiring upfront payment.
Limited working capital holds back growth
Purchase factoring is useful not only during crises but also for fast-growing companies, where a sudden large order can create a capital shortfall for purchasing raw materials. This is especially relevant in industries with moderate profitability of around 15–20%, where production cycles can last several months and equity alone is insufficient to fund growth of, for example, 40% a year without external financing.
Growing understanding of the tool
Over the past five years, understanding of factoring among Latvian entrepreneurs has improved substantially. While it was once often confused with a standard loan, more business leaders now grasp its practical value for maintaining cash flow. Purchase factoring is currently used actively in sectors such as defense, energy, cosmetics and woodworking, including to take advantage of favorable purchasing opportunities that require immediate payment.
