2023 Commercial Factor Year in Review

After a year that has been littered with challenges, particularly for the transportation factoring space, leaders from several factoring and ABL firms gathered to discuss performance in 2023, the Federal Reserve’s actions to combat inflation, ever-increasing state disclosure laws, artificial intelligence and more.

How would you describe your firm’s performance in 2023?

Robyn Barrett, Oxford Commercial Finance: Oxford Commercial Finance doubled the portfolio in 2023. We are very pleased with the growth, as we are still building OCF and adding new team members.

Lori Gustaf, FirstLine Funding Group: In a word – flat. It’s been another tough year in transportation for even the experienced carrier, which resulted in stagnant growth opportunities for both of us.  Although we still had growth as far as the number of invoices purchased, the invoice revenue fell short from what we hoped to see this year. 

At the beginning of 2023, freight rates in our portfolio averaged $500 less per invoice than 24 months ago. As the year progressed, we did see some rate recovery, and as November came to a close, our portfolio still lagged at least $200 per invoice less than this time last year. With continuing increases in insurance rates, repair shortages and little relief in fuel prices, even the best carriers have been hurt to the point that many have decided it is time to retire, sell off equipment or simply close their doors. Bankruptcies filed by carriers have been at their highest levels in more than 15 years.  Those who have been able to stick with it are requesting more expedited settlements (wires) and looking for additional over-advances to cover insurance premiums, repairs and other operating expenses. Even though an over-advance comes at a higher cost than factoring discounts, many carriers have found it to be a necessity to keep their equipment on the road and drivers paid.

Greg Salomon, Oxygen Funding: Oxygen Funding acts like a smaller community lender for the Southern California market, and so as the local business market goes, many times that is how we do. We are fortunate to have some national exposure, but that comes solely from our contacts. Since we do supply chain financing for e-commerce companies, factoring and some purchase order lending, it certainly gives us more opportunities to review. 

For 2023, we are up about 12% year over year, which is nice. However, we have had to go through a lot of challenging opportunities to get there. I would say our analytics show we had to look at about 33% more deals to get roughly the same fundings we were used to in 2021 and 2022. So, while a positive outcome, it feels like we had to work a lot harder.

Loren Shifrin, REV Capital: Slow start. Strong finish. The transportation industry’s volumes and rates continued to settle in Q1/23 and we started to see a pick-up in Q3. Our diversification outside of transportation, coupled with new leadership for our sales team, led to very strong performance and growth in the second half of the year.

How would you describe the overall factoring industry’s performance in 2023?

Barrett: Transportation factor portfolios were down and general factors were flat. Many companies received large checks for government programs which helped bridge any cash flow issue. This has led to a reduced need for factoring. We are seeing an uptick in leads as companies spend through the government money and new business startups are increasing. We are also noticing banks are not asking clients to exit but instead are not willing to increase credit facilities or give accommodations.

Gustaf: Even though we are all tired of dealing with this extended downturn, I feel that, overall, the factoring industry stepped up in a big way during a trying time. Factors have proven their ability to quickly pivot from flexible discount programs to other ancillary product offerings for current clients and prospects.

Salomon: As mentioned, my firm is located in SoCal, and we are fortunate to be very active with other lenders in the space. In fact, we participated with some of our favored factoring related lenders locally. As well, I sit on the board of the IFA and so have a perspective from that.  I would say taking all that in, 2023 was not the year that was expected.  As we went into 2023, we predicted this would be “the year of the asset-based lender.” That, by and large, didn’t materialize. So, as to the general business lending climate for ABL, I would say some of us still had good years, but many would say they were down. This does not include transportation and logistics lending, as that is not part of our lending. For that group of lenders, it has mostly been a very tough year.

Shifrin: Discussions with colleagues echo our experience. Many transportation factors have not seen much growth (if any) this year. The transportation sector has certainly shifted from the boom the economy experienced over the past two years, and the effects are felt by lenders that support the industry. General factoring, in contrast, seems to be booming. As traditional lenders reduce their appetite for extending credit to SMBs, factoring becomes more attractive and accessible to growing companies.

How have the Federal Reserve’s actions this year to address inflation influenced your business and the industry at large?

Barrett: The rapid rise in the federal funds rate has caused serious cash flow issues for companies that leveraged up with debt during the low interest rate period. This has caused companies to seek alternative lending to help finance working capital. While this is good for the factoring industry, independent factors are negatively affected, as they have seen factoring income spread reduced, which could lead to compliance issues with senior lenders.

Gustaf: Competition in the transportation space has forced factors to low and flat rate pricing over the past five years. As interest rates increased multiple times this year, this has put the squeeze on margins for factors who fund their portfolios tied to variable interest rate lines of credit. Even through most security agreements accommodate for fluctuating interest rates, factors find it difficult to pass the increased interest expense on to their client for fear of losing the account altogether.

Salomon: Certainly, I think the Fed action has had an impact on business this year, mostly a negative one. The costs of doing business have increased substantially, and some business owners are reluctant to pass those costs to their clients, which then compresses their margins and profitability. However, the positives for the industry are that the banks are affected by the rates, pushing some businesses into non-profitable status, which then means they exit some of these clients to ABL lenders. So, as a whole, the ABL industry benefits, while the business owners might struggle more.

Shifrin: Most transportation factors operate on a flat fee model. Most flat fees structures are not tied into the prime rate. The nature of these pricing models created a significant reduction in margins for a lot of small transportation factors. The effect is made worse for those companies that engaged in heavy price competition over the past two years.

Non-transportation factors seem to be relatively unaffected by the increases. Margins remain the same and pipelines are filling up with traditionally bankable clients looking for alternative lending solutions.

We have prime-rate adjustments in most of our agreements. We got to experience all of the upside of increased business opportunities without the downside of shrinking margins.

Do you feel better, worse or the same as you did a year ago about the continued introduction and implementation of new state disclosure laws? Why?

Barrett: Worse! Way worse. Six states have enacted disclosure laws and eight others introduced disclosure laws. Each state has different disclosure laws and regulation, which is a huge administrative burden on factors of all sizes and especially small, independent factors. The American Factoring Association is actively working to monitor the state disclosures and keep the AFA members up to date on any changes or new states introducing disclosure laws or registration.

The AFA is investigating the possibility of a national disclosure law, but this takes a lot of time and is an uphill battle. Regardless, the AFA will continue to advocate on behalf of the factoring industry to lessen the burden of disclosure laws.

Gustaf: I have felt genuine concern for the increasing number of states adding in disclosure laws and the fact that each state’s requirements are different from the next. Although I question if some states will be able to staff for proper compliance oversight, it does not mean anyone should by any means ignore it. As more states jump on the disclosure bandwagon, time will tell if the federal government steps in and makes the move to a uniform process. 

I am a strong advocate of the AFA, which makes it a priority to stay on top of important legislation and, especially right now, on ever-changing disclosure laws. I encourage all non-members to consider joining the AFA today.

Salomon: Being headquartered in California, the new state disclosures have me feeling the worst that I ever have as to state oversight.

First of all, we feel that most of the disclosures have been brought upon by the merchant cash advance and high rate daily and weekly bank statement lenders. These loans are significantly more expensive than factoring and ABL. Also, when they fail, the legal backing of many of these lenders is very strong and determined, and when the business fails, or is severely harmed, this owner has a greater propensity to escalate their anger toward their local state government representatives. That certainly has happened over the last few years in greater numbers, and the ABL industry in California and many other states is being punished for it.

That’s not to say all factors and ABLs are angels, but our value is in working together with the business owner, even in tough times. However, the bank statement lenders many times go right for the money they feel is due them without really working it through. The most recent SB666 regulation might really tell the situation in its “devilish” implementation.

So, we are now having to work “afraid” of what the state might do next, and that then hurts our ability to take on more risk for some clients that we would normally stretch more for. The state disclosure laws are just an overreaction to label us all the same. We just want to be judged on our own ABL results, and this is not the case now. So, we do feel worse  but just have to fight through it the best we can for the benefit of our business owners, staff and industry.

Shifrin: My feelings remain unchanged. From a business take-on perspective, we have been unaffected by the new disclosure requirements. Clients don’t seem to be deterred by having APRs thrust upon them. That said, I am concerned about the near future when enforcement of the disclosure requirements will begin to take place. My understanding is that the states themselves don’t have any budget oversight and enforcement. What happens when lawyers start initiating civil lawsuits against lenders that attempt to take advantage of the overly ambiguous guidelines around the disclosures themselves?

Artificial intelligence was one of the most discussed topics of 2023. How or when do you expect that type of technology to make a meaningful impact on the factoring space?

Barrett: I think general factors are interested in how AI can create efficiency in the underwriting and portfolio management process. It is hard to say when AI would make a meaningful impact on the factoring industry, but I would guess in the very near future. .

Gustaf: I believe AI is already making an impact in transportation factoring. With thinner discount margins, we are utilizing machine learning to implement faster invoice processing, quicker verifications, expedited pay status answers and automated cash posting. I feel there is significant benefit in having more efficient freight bill analysis using AI in finding those paperwork anomalies on day one so they may be quickly addressed. 

Over the past few years, shippers and brokers have begun accepting fewer calls from factors who are verifying invoices or checking payment status. As debtors become more automated themselves using AI, they can electronically transfer information to the factor through reporting networks rather than answering calls or emails one at a time. Using transportation specific technology, we have been able to identify and correct paperwork issues sooner, decreasing days to pay and reducing the likelihood for chargeback on recourse carrier agreements. Aside from decreases in portfolio risk, the impact on overhead and staffing expense is a major win for low investment while adding growth to the business.

Salomon: AI certainly was the hot Wall Street conversation this year and resulted in billions of dollars of investment decisions and stock trades. I think for the average ABL lender, the real impact will probably be felt in 2025 and beyond. For now, it isn’t replacing staff or resulting in enough benefit to be a hot topic for the industry. I do think the larger banks and related ABL firms are benefiting from it sooner, although I think 2023 wasn’t the year for any real achievement or impact for most of us.

Shifrin: AI will be commonplace and industry standard within five years in my opinion. Our marketing department uses it to help with copy writing and generating discussion topics. My IT department uses it to create efficiencies when coding. I expect AI to drive huge efficiencies in data entry and cash posting. Simple collection processes will become automated, outbound sales will become more effective and account executives will be able to communicate with more clients.

What’s something that occurred this year that you did not expect and how did you adjust?

Barrett: I didn’t expect the federal funds rate to increase at such a fast pace and was surprised more banks didn’t ask more clients to exit. Oxford Commercial Finance is prepared for the fallout of deals from banks and we have adjusted by building a very strong and experienced team to manage new businesses.

Gustaf: The number of medium to large freight broker shutdowns and bankruptcies has been staggering this year. Managing facilities has been especially stressful. Debtor pay trends don’t always show a dramatic dip before notice of closing appears in the industry news. Bond filing volume has been at an all-time high with little payout success. It’s just been one more blow for our clients who are already having a difficult time out there.

Salomon: Well, really, we didn’t expect SB666 from the state of California to be anticipated, and here we are. This, again, was just the biggest single negative occurrence that we had happen. On a positive side, with the bank exits finally starting to come our way as of late Q3 and early Q4, I think this will be ongoing for a while and that leads to adjustments. For us, we are doing more hiring this year than any time since 2020. We are eager to get qualify operations people in place to help with the inflow of deals and that is exciting!