As the New Year approaches, the U.S. economy seems headed for a “soft landing,” and with inflation moderating, the Federal Reserve may be done raising its benchmark interest rate. Considering the potential economic headwinds and uncertain risks, the impact on alternative business funding sources, especially those in the factoring industry, is significant.
New trends emerging for 2024 will present both opportunities and challenges. Recognizing and preparing for these trends will help you navigate the year ahead.
Challenges Facing Alternative Business Funding Sources
Alternative business funding sources (“non-bank”) have grown increasingly popular in recent years with entrepreneurs seeking to secure financial services outside of traditional banking institutions. However, these alternative funding sources are facing their own set of challenges.
Economic and Geopolitical Headwinds: The U.S. economy is weakening and may slip into recessionary territory. The rate of inflation is moderating and the Federal Reserve may be done raising its benchmark interest rate, but interest rates will most likely stay higher for longer to achieve the Fed’s 2.00% inflation target.
With the Chinese economy slowing for a variety of reasons, the growth rate of the U.S. economy will be further impacted. There is a threat of deflation as the Fed reduces the size of its balance sheets thereby reducing the money supply while the banks are simultaneously reducing credit further to middle market companies.
These economic facts create opportunities and challenges for factoring professionals. As the money supply shrinks, so does the liquidity of investors who support our industry. Additionally, as the banks pull back from extending credit to the middle market, the opportunities to invoice factoring companies with stronger balance sheets will present themselves.
Increased Competition: Big tech companies have begun launching their own factoring services platforms. For example, Meta, the parent company of Facebook, introduced Meta Invoice Fast Track in October 2021, factoring invoices for U.S. companies owned by women and minorities. Meta will probably expand this service, and other big tech companies will likely launch similar platforms. These platforms will eventually add additional services to compete with other segments of the fintech industry.
Regulatory and Compliance Requirements: Challenges will arise from implementing new regulatory and compliance requirements in 2024, and the application of a one-size-fits-all approach to enforcing the new disclosure framework.
Implementation of new commercial finance disclosure regulations (“CFDR”) in New York, Utah, and California began in 2023. At least nine states across the country have, or are considering, consumer- style disclosure requirements.
Providers of commercial finance services will now be subject to the new CFDR regulations and compliance requirements that require they provide consumer-style disclosures for transactions, and financial brokers will also be responsible for fulfilling certain steps in the disclosure requirements.
CFDRs will freeze many small businesses out of the commercial finance market, and limit their financing and business funding options. Lenders and financial service providers will pull out of some states altogether and will not be able to provide service anymore.
Factoring Industry Trends for 2024
Invoice factoring is an alternative business funding option that allows businesses, small and large, to sell their unpaid invoices to a third party in exchange for immediate cash. Invoice factoring helps businesses improve their cash flow, access working capital, and facilitate the growth of their operations. Some key trends that are shaping the future of invoice factoring in 2024 include the following:
- Growth of Factoring Services Market: The global factoring services market size was valued at $3.567 trillion in 2022 and is expected to grow at a compound annual growth rate (CAGR) of 9.20% from 2023 to 2030. The increasing need for alternative sources of financing for small and medium-sized businesses is driving market growth.
- Shift in Client Base: Factoring companies may experience a shift in client base as traditional industries such as textiles and apparel decline in volume while others such as construction, information technology, green manufacturing and energy, and service based companies, grow in demand. Factoring companies may further diversify their services and financial products to cater to other emerging sectors and regions.
- Business Model Transformation: Factoring companies will be looking for new financial products or services to provide to their clients. This may include partnering with other commercial finance service providers and launching new business funding platforms to enhance their financial service offerings and solutions.
- Emergence of New Technology: Competition is driving the development of new technology to streamline the invoice factoring process, reduce expenses, and improve customer service and experience. The use of AI, blockchain, cloud services, data analytics, and risk assessment can be either a challenge or an opportunity depending on how quickly and effectively industry participants implement them to set themselves apart from the competition. Interestingly, factoring companies may gain an advantage by not adopting new technology to improve customer service and experience. Clients that are used to personalized service may prefer to continue interacting with a person and not a ChatBot or AI generated questions and answers that steer them to automated solutions instead of a person to help them.
- The Need for Flexible Funding Options to Fill the Gaps Left by Banks: The difficulty small and medium-sized businesses are having obtaining or renewing bank loans is driving increased demand for alternative business funding sources that can provide fast and flexible funding solutions, like invoice factoring. Increased thresholds for risk, tighter underwriting criteria, regulations, and bank failures are resulting in more loan turndowns and bank workouts, and increasing the need for turnaround and restructuring services.
- Increased Demand for Supply-Chain Finance: The increasing friction with China has increased on-shoring and efforts to lessen concentration of critical materials/parts/products with one supplier and one country. This deleveraging of supply-chain risk is driving an increased demand for supply-chain finance, including reverse factoring. Reverse factoring programs give clients the ability to support suppliers by financing their receivables with a factoring program negotiated by the client, usually at a lower cost than suppliers would be able to obtain on their own.
Invoice factoring is a dynamic industry that is constantly evolving. Even considering the potential economic headwinds and uncertain risks, opportunities for those in the invoice factoring industry are favorable. The demand for alternative business funding solutions is expected to increase due to the need for flexible funding options, supply-chain financing, accelerated cash flow to squeezed suppliers, and unsatisfied demand from underserved businesses and industries.
Successfully Capitalize on Opportunities in the New Year
The key to successfully capitalize on the opportunities and overcome the challenges in 2024 is to work with a factoring company, like Capstone, that has the experience and resources to provide fast and flexible business funding solutions for financial professionals and their clients.
Capitalizing on the above trends will help you increase your business pipeline, and meet your clients’ working capital needs. Capstone works with financial brokers, business consultants, and ISOs to develop new business opportunities and help grow business volume.
We have been engaged in the industry for over 30 years providing client-specific solutions through Factoring Services, Purchase Order (PO) Financing, and Domestic and International Trade Financing. Now is a great opportunity to partner with Capstone. For more information on developing broker business opportunities, visit our broker resources.
