The factoring industry has undergone radical changes, and a growing number of concerns exist which overshadow the outlook for the factoring market in the second half of 2022 and 2023. Despite these concerns, there are opportunities that factoring brokers and independent sales offices (ISOs) can capitalize on to grow their business pipeline and meet their client’s working capital needs.
In the two short years since Capstone’s 2020 Global Factoring Report, the U.S. and the world have experienced upheaval from the COVID-19 pandemic, an economic recession with unemployment not seen since the Great Depression, massive fiscal stimulus packages including direct payments to individuals and loan guarantees for businesses, the worst inflation in four decades, a rapid increase in short-term interest rates, the war in Ukraine, and the onset of another economic recession.
Not surprisingly, factoring and trade finance volume fell 6.5% globally and 23.0% in North America in 2020 and rebounded strongly in 2021 with increases of 12.6% globally and 45.7% in North America. The global factoring market is expected to grow further at a CAGR of 6.08% during 2022-2027, from $3,109 billion in 2021 to $4,430 billion in 2027.
Concerns Overshadowing Alternative Funding Sources
The U.S. economy is slowing and may be in a recession after two consecutive quarters of negative GDP growth. Inflation may moderate but will likely remain at persistently elevated levels for some time. Persistently elevated inflation rates will give the Federal Reserve reason to continue raising short-term interest rates until the Fed’s inflation target is reached.
The war in Ukraine and growing friction with China may develop into wider conflicts that could disrupt economic growth further.
Overreaching state and federal regulations and disclosure requirements pushed upon alternative funding sources may create a credit crisis with businesses having fewer financing options as more alternative funding sources consolidate or go out of business. As of 2020, more than 90% of all domestic invoice factoring was done by small and medium-sized businesses. These business owners often struggle with cash flow, and as a consequence, they have the greatest difficulty in obtaining traditional financing.
The difficulties many businesses have encountered obtaining traditional financing have increased the number of prospective clients with SBAs, senior liens, and MCAs, making it more difficult to approve new clients if Subordination Agreements or Inter-creditor Agreements cannot be obtained.
Despite these concerns, there are opportunities factoring brokers and ISOs can capitalize on to benefit both themselves and the prospective client.
Trends that Factoring Brokers and ISOs Can Capitalize on:
Stretched payments – During an economic slowdown, businesses “stretch” their accounts payments on their accounts receivable. This creates a cash flow problem for many businesses and an opportunity for factoring brokers and ISOs to work with alternative funding sources, such as Capstone. The key to surviving an economic slowdown is cash flow management. Businesses caught in a cash flow “squeeze” are more receptive to using invoice factoring as a cash flow management strategy to accelerate their cash flow. When the economy is in a decline, businesses have used invoice factoring to help them survive.
Tighter lending standards – Small and medium-sized businesses may find it harder to obtain loans from traditional financial institutions as banks tighten their lending standards, raise their risk thresholds, and focus on their larger, well-heeled customers. This increases the number of potential clients that will need alternative financial products. Capstone offers custom-tailored alternative funding solutions, including invoice factoring, purchase order (PO) financing, domestic and international trade finance, and pre-exporting financing programs, which can be integrated into any business model.
Underserved businesses and industries – In Capstone’s experience, businesses in the following industries, as well as MWDBEs, are underserved by traditional funding sources, including:
- Construction – General Contractors and Subcontractors
- Manufacturing
- Coal Mining
- Oil and Natural Gas
- Suppliers/ Distributors
- Renewal Energy and Environmental
These types of businesses and industries have a significant number of potential clients for including invoice factoring and PO financing. Capstone understands the unique challenges faced by these businesses and has the experience necessary to structure a successful funding strategy to support their working capital needs.
Prior SBA loans, senior liens, and MCAs – Many prospective clients may have prior SBA loans, senior liens, and merchant cash advances (MCAs). It is important when working with these clients to also work with the right alternative funding source. Negotiating a Subordination Agreement or Inter-creditor Agreement with senior lenders requires experience and skill. Fortunately, Capstone has a track record of successfully negotiating the proper agreements for their clients. As the economy weakens, there will be more businesses in this situation that may benefit from invoice factoring.
Decline of government-backed loans and relief programs – When looking back to 2021, the biggest competitor for the factoring industry was the U.S. government with economic injury disaster loans (EIDL), Paycheck Protection Program loan forgiveness, and other government stimulus programs. When the businesses that took advantage of these programs burn through the liquidity they received, traditional lenders will start weeding out the companies that don’t meet their more rigorous credit criteria. This will be an additional opportunity to develop these businesses as prospective clients for a funding solution through Capstone.
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The United States continues to be one of the largest markets in the world for invoice factoring. While the outlook for the remainder of 2022 and 2023 is uncertain, there are several variables in play that can both positively and negatively impact the economy and the volume of invoice factoring over the near term – recession, inflation, rising interest rates, government regulations and disclosure requirements required of alternative funding sources, and geopolitical events.
At the same time, these macro-level factors will create a business environment where small and medium-sized businesses will need invoice factoring and PO financing more than ever to provide the working capital financing to survive a recession and the impacts of inflation and higher short-term interest rates. Capitalizing on the above trends will help you increase your business pipeline and meet your client’s working capital needs.
