Commercial Factor 2023 Outlook

In part two of a Q&A reviewing 2022 and previewing 2023, representatives from FirstLine Funding Group, Republic Business Credit and eCapital discuss their expectations for 2023, concerns for a looming recession and where they see both challenges and opportunities.

How would you describe the state of the factoring industry entering 2023?

Lori Gustaf, FirstLine Funding Group: With the rail strike settled in December, unless we have another major event to disrupt the supply chain, I expect rates to stay pretty flat going into 2023, or at least until spring hauling begins again. Even though we can admit that rates today are still above where they were in 2019, the cost of doing business does not adjust in comparison when rates go up and down. Our customers now are feeling the squeeze of increased insurance and fuel prices while rates are declining and bringing less and less to their bottom line.

Rob Meyers, Republic Business Credit: The overall industry is strong, portfolios are in good shape and several signs are pointing to banks tightening up on credit. We remain optimistic entering the year and believe it will present a tremendous amount of opportunity.  

Marius Silvasan, eCapital: This year required all of us to adjust to a new fiscal policy and slowing economy. I expect to see a continued economic slowdown into 2023 with increased levels of business failures. Factors will need to closely monitor the performance of their portfolios and any deteriorating credits. Banks will likely continue to tighten their credit requirements, which I see as an opportunity for the factoring industry, as a tighter credit environment is an opportunity for non-bank lenders to expand their portfolios.

How do you think recent elections will impact the factoring industry in 2023 and beyond?

Gustaf: Because the shift in Washington did not happen to the extent some may have thought, we may not see much impact or change but will see increased gridlock on the larger issues with a divided government between the House and Senate.

Meyers: My grandfather always told me divided government was better for businesses as they are empowered to plan, invest and create jobs. I’m happy to stick with his wisdom! The only thing I would add is while state government elections were more uneventful than expected, as California’s and other disclosures continue to gain speed, I would expect more states to follow. We are planning for things to continue on their current planned legislative agendas and will make sure to keep abreast with both the American Factoring Association’s and Secured Finance Network’s advocacy committees.  

Silvasan: I don’t expect the elections to impact the factoring industry. We will need to have a ‘wait and see’ approach in terms of the impact any changes to fiscal policy following the election may have.

How concerned are you about an economic recession? Why?

Gustaf: Although the supply chain has slowed, the labor market has stayed steady with unemployment remaining historically low. Although it feels like we are in a recession right now, the indicators are that we will likely see a mild recession of six to 10 months, but whether it will hit in the first half of 2023 or the second half is anyone’s guess. The hike in interest rates will continue to tighten margins for small business owners and, together with slower paying debtors, may cause borrowing bases to fall out of compliance. Factoring may be the best option for these owners to continue to meet their daily cash flow needs. 

Meyers: Many people remind me that we are already in a recession by some measures; however, I have no doubt we will talk ourselves into it one way or another at this point. Sometimes I wonder if we all read the Wall Street Journal too much, but my concerns are genuinely moderate and narrow, meaning I don’t think we are in for an epic collapse or anything along those lines. I view a longer, slower and more intermittent recession that would affect specific industries and debtor credits and create some dilution challenges over the course of the next couple of years. The connectivity of our factoring and asset-based lending community will remain paramount as we confront these challenges together. 

Silvasan: I expect a recession in 2023; however, I believe it will be short. I also anticipate a reversal in fiscal policy to occur upon us entering a recession. I’m not overly concerned, as I believe well managed and capitalized factors will emerge stronger post-recession. We are keeping dry powder aside to be able to capitalize on opportunities as they come our way during the next economic cycle.

What is the greatest challenge you foresee for your company and/or the industry in the next 12 months and where do you see the greatest opportunities?

Gustaf: Staffing continues to be a concern for us as it is for many. Outsourcing may be the wave of the future, whether it be hiring through remote working environments or engaging with outsource staffing agencies. Training the inexperienced remote worker on the level of risk we face each day and the need for speed, accuracy and attention to detail might be the biggest concern if new staff members do not have previous employment in factoring, specifically in the transportation niche.

Meyers: According to several economists, the Federal Funds Rate is on its way to 7% over the next few years. This “new normal” period of high interest rates will feel more standard than abnormal before we know it. The greatest challenge facing the industry will be maintaining net interest margins and/or spread. Recent competitive years during historic low interest rate environments will likely separate out those building market share vs. those building sustainable and profitable enterprises.

I think the greatest opportunity is the number of small businesses that will seek funding over the next few years, and that with an abundance of financing opportunities, you will see banks and independent finance companies thrive. As they say, “A rising tide lifts all boats.”

Silvasan: Managing increased borrowing costs and operating expenses, increased risks of client defaults and overall capital availability are key areas for us as we navigate the market over the next 12 months. Some industries are more vulnerable to recessions than others, so managing industry concentration levels is also important in 2023. That said, I strongly believe that recessionary cycles are breeding grounds for opportunity. We stand ready to navigate through the next cycle and emerge larger and stronger. 

What are your overall expectations for the factoring industry in 2023?

Gustaf: I think we can expect to see more and more businesses needing factoring services, creating a favorable sales environment with healthier yields. There may be increased acquisition opportunities as well. Even with the gloom of the economic challenges out there, I do think it is an opportunity for factors to “seize the day.” 

Meyers: The factoring and independent finance industry remains full of dynamic, intelligent and creative leaders who will continue to be successful no matter the circumstances. I think 2023 will be a good year, with 2024 and 2025 being banner years. 

Silvasan: There are still storms to weather in 2023, but the clouds have a silver lining. I expect well-managed and well-capitalized factors will not only survive but thrive in the coming year. As banks tighten their credit requirements, non-bank lenders will be able to increase their portfolios. Additionally, economic downturns provide an opportunity for risk-tolerant companies to make acquisitions. I believe we can navigate through this recessionary cycle and emerge even stronger.