Charting the Course Through 2024’s Factoring Landscape: A Lender’s Outlook

Maximizing competitive edge and growth amidst uncertainty, increasing regulation and technological advances

By Justin Hatch, Chief Lending Officer, at TAB Bank

Factors face 2024 with several dynamic challenges. Some industries are struggling, while others await the headwinds of the unknown. Interest rates are high, and competition is strong, both of which continue to put downward pressure on margins. Is a potential recession still looming, or has the fear subsided? Fraud continues to increase in volume and complexity. Regulation and legislation are often a concern, and during an election year, it feels like anything can happen.

As a lender for factors, we see a broad perspective on what these companies do well, how they can improve and, most importantly, what challenges they face as we enter 2024. Even with the obstacles in our path, factors can control many aspects of their businesses. From our perspective in the marketplace, there are many challenges and opportunities for factors in 2024. 

Recognize your competitive advantage 

In an increasingly high-tech industry, factors must define their competitive advantage. Focus on identifying your company’s unique strengths and capabilities that distinguish you from competitors. Part of that focus is reviewing your competitors and analyzing market and customer needs. Knowing your competitive advantage involves deeply understanding your core competencies and how your company differentiates its resources, skills and technology. By aligning unique qualities with market demands, companies can create a sustainable competitive edge that is difficult for others to replicate. 

Determine your capital strategy

Chasing desired growth plans without a clear capital strategy can lead to failed goals and objectives. Moreover, not having the right capital structure may not only harm future growth but also prohibit the funding of existing clients, thus causing irreparable harm. Understanding and having the right mix of senior debt, subordinated debt and equity is imperative to achieving your overall financial goals. For example, having a working capital line of credit from a senior lender will add critical availability and flexibility when funding your customers. In addition, ensuring you have the requisite amounts of subordinated debt and equity will help you meet the requirements of your partner lender by not becoming overleveraged. Here are some questions to help determine your capital strategy: What are the commitments and exposure with your existing portfolio? What additional financing will your growth plans and budget require? Is your existing availability sufficient? What is the impact of fixed vs. variable pricing? 

Coupled with a capital strategy, utilizing the right Treasury Management Services (TMS) streamlines financial operations, enhances control over funding clients and automates routine cash management functions. Additionally, these services can help facilitate proper compliance and ensure resilience in dynamic business environments.

Strategic viewpoint of technology

The days of extremely cautious advance rates and high yields appear to be over. Technology has reshaped the industry over the last 15 years, enabling lenders to enhance portfolio monitoring and increase operational efficiency. This is good news for borrowers as it has forced all lenders to be more competitive. No matter your size, technology must be baked into your business strategy and cover all aspects of the business. Today, many “off-the-shelf” software packages are available to keep your business running lean.

Are you using a customer relationship management (CRM) system to manage your sales process? A solid CRM that integrates with your underwriting process will save a lot of time. Additionally, many marketing tools can plugin directly to your CRM to automate marketing campaigns. How are you monitoring client performance? Business intelligence (BI) tools can be integrated to monitor client performance, offering valuable insights. These tools are very customizable, and most are considered “low-code” tools. Lastly, the scalability of your loan software is crucial. How will the database respond when your portfolio doubles in size? Savvy business owners consider and plan for all potential growth outcomes.

Fraud and security: A constant concern

Protecting against fraud and security threats is a critical concern for factors. Even the best companies awake to find their systems compromised, and a new breach seems to be reported daily. Ensure you have the systems and processes to protect company assets and personal information. If resources are limited, consider hiring an outside security firm to create the necessary defense systems. Train employees continually about best practices for handling company assets and personal information. 

Fraud is increasing exponentially. Create the processes to discover fraud. Learn from past mistakes and the mistakes of similar companies. Tie the results to key performance indicators (KPIs) for your fraud prevention teams. 

Operational efficiency adjustments bring faster success

Efficiency in operations and compliance with increasing regulatory oversight remains a significant challenge. Factors must be agile and adapt to market conditions swiftly while maintaining compliance. Each industry comes with its unique set of operational challenges. For instance, in the last two years, transportation has grappled with issues ranging from fluctuating supply and demand to escalating fuel costs, impacting margins significantly. Reacting quickly to a specific industry challenge can enhance your competitive advantage and bring faster success to your firm, especially in difficult times. 

Maintaining control amidst growth and competition

Rapid growth can outpace a company’s ability to maintain essential controls. Don’t compromise on the outcomes of your due diligence process, and don’t cut corners. Increased competition may also tempt you to loosen controls and structure. One common oversight is high customer concentration with debtors or clients. What are the ways in which you maintain appropriate debtor and client limits?

Diligent due diligence, both initially and ongoing, is critical to maintaining the proper processes to manage growth and competitive pressure. Many high-growth companies have failed when growth outpaced their ability to uphold critical processes.

As a result of last year’s economy, banks and lenders are seeing increased regulatory oversight. More regulation might impact your company and industry. Do you have the strategy and processes to ensure compliance? Frequent review and adherence to regulatory pressures can help keep you out of trouble. 

Communicate, communicate, communicate

Regular communication with your lender and clients can mitigate risks associated with surprises that may arise from market fluctuations. Most people don’t like surprises, and that includes lenders. Maintaining transparency and consistency in communication will yield better partnerships that can last years through good times and bad.

As we step into the complexities of 2024, it’s clear that the factoring industry faces multifaceted challenges ranging from evolving technological landscapes to continuing economic uncertainty. Yet, within these challenges lie opportunities for those willing to meet the challenges head-on. By honing a clear competitive advantage, implementing a robust capital strategy, leveraging technology judiciously, fortifying against fraud and maintaining operational efficiency, factors can not only navigate the current climate but also thrive within it. The companies that blend strategic foresight with an adherence to core business principles will emerge stronger, more agile and ready to capitalize on the growth opportunities that 2024 presents.