Commercial Factor 2024 Outlook
Following up on our 2023 year in review, Commercial Factor spoke with several leaders from factoring and ABL firms to discuss their perspective on 2024, including a look at the challenges and opportunities ahead and how new technology, industry consolidation, continued fraud risk and more will shape the factoring industry in the next 12 months.
How would you describe your firm’s performance in 2023?
Robyn Barrett, Oxford Commercial Finance: Oxford Commercial Finance is still in its infancy and 2023 was the first full year of operations. Our focus was on building the portfolio and attracting top talent; we were successful with both initiatives. We are finishing the year with a very strong pipeline, which will jumpstart 2024, and with the strength of Oxford Bank’s balance sheet, we have the capital to grow and meet portfolio goals.
Lori Gustaf, FirstLine Funding Group: We are looking for a slight business uptick in 2024 but not before the second half of the year. It really depends on the type of industry that your business serves. With all the broker/shipper bankruptcies and daily evidence of identity theft, transportation factoring is as scary as it has ever been, but if you are a general factor, there might be increased bank turndown opportunities while interest rates remain higher than they have been in many years.
Greg Salomon, Oxygen Funding: I would say that we are bullish about deal flow and think this will finally be the year to meet the positive projections that have been expected since 2022. Industry discussion both within the International Factoring Association and with my factor and asset-based lending owner friends is very positive. This has been backed up by high level deal flow into December, and while there will be a normal expected holiday pause, that high level deal flow should continue. This is a result of the Federal Reserve actions, showing that rates are not coming back down next year, that inflation has cooled a bit, and business owners can now better plan for their immediate future with financial needs and consumer demand. Let’s keep in mind: Consumers really have not stopped buying. That is key for all of us in one way or another.
Loren Shifrin, REV Capital: While some companies may be thriving, it would seem to me that most are simply surviving. Many factors saw little, or even negative, growth in the last year, combined with shrinking margins, increased volatility in the transportation sector, a relative dry spell in new business flow, increases in attempted fraud, frustrations with the labor market and a relative cooling of interest/access from banks and credit funds. That said, our industry is strong and our members are resilient. We have survived this year and will enter the next one stronger, wiser and more equipped to handle whatever the year has to bring
What is the greatest challenge you foresee for your company and/or the factoring industry in the next 12 months and why?
Barrett: Continuing to build a strong team and bringing them back in the office will be a challenge. I strongly believe in having the team in the office at least three days a week for better collaboration and effective management of the portfolio. Getting employees back in the office has been difficult, but many banks and independent lenders are mandating in-office requirements for 2024 and I think this is a positive trend. Factoring and asset-based lending is fast paced and requires team work and the sharing of ideas and solutions. Being in an office is the best way to achieve effective portfolio management.
Gustaf: Transportation factoring is going to continue to struggle for much of the next year. Fraud is a daily challenge no matter what your business factoring niche might be. Make sure you have the proper software in place to catch faked documents. Stay on top of email addresses and phone numbers. Factors must work to serve our customers at such a quick pace that fraudsters rely on those small but missed details, such as a dropped or added letter(s) in an email or use of one type .com over what the norm may be with each account debtor.
Salomon: I think, for my company, the challenge is truly how to design flexible financial solutions, all while not overwhelming our operations staff. There are many different needs in business growth and even bank-exited deals. We have been trying to configure our programs better to flex with the needs we are presented. This means, that while factoring is still an amazing program, our growth has been in supply chain finance and even term loan expansion. These programs are more challenging for us to operate and riskier to our investors. Keeping in mind state mandates for rates and fees, we have to figure out how to improve our qualify offerings and find more qualified candidates. Working directly with our bankers, outsourced CFOs and each other, we need to respond to unique needs that might be lower risk but “not in the box.”
Shifrin: I am worried about small to medium-sized factors being able to access affordable and scalable institutional capital partners. I have concerns about the increased rates and sophistication levels of fraud. I am also concerned about the state of the transportation industry, which directly affects the overall health of our industry. Although I believe that opportunities will be plenty next year, I would still recommend exercising higher levels of caution in funding operations.
Conversely, where do you see the greatest opportunities for your firm and the industry in 2024 and why?
Barrett: Oxford Commercial Finance has the capital and experienced management team to really grow in 2024. The strength of the management team allows OCF to consider and manage risk that traditional lenders just can’t do. The opportunity to integrate artificial intelligence and machine learning will help OCF — and the industry — to automate certain functions, which will reduce errors, reduce expense and allow employees the opportunity to move into new roles. The more lenders can leverage technology, the more competitive they can be in terms of pricing and structure.
Gustaf: We must be able to pivot and diversify our portfolio into types of industries that we have served in the past and target sales to move back to areas we already are familiar with and understand to maximize yield while other industries we serve are struggling to recover. Over the past year and a half, we have spent a lot of time analyzing and updating our technology and mobile platforms while shoring up procedures and updating our credit policy. We have worked on additional training for staff with in-house and external training sessions and webinars. In departments where we could maybe get by with current staff, we replaced openings to give us plenty of time to train up the newcomers in a slower mode to ensure they fully understand their role and the risk involved.
Salomon: The same issue of demand and unique business funding needs has the upside of allowing factors and ABLs to potentially acquire better business clients, as long as we find the right balance of risk, rate and outcome. We strive to be a bridge lender that gives money and advice to then get our clients to be bankable at some point. That opportunity is here for us now to improve upon. So, both my company and the industry will get a solid window of time in 2024 to help clients and be a part of partnering with business owners to truly help.
Shifrin: Untapped markets and new technologies. I don’t believe our industry has even scratched the surface of what is possible and there are many industries that remain relatively untapped and, at times, completely ignorant to the existence of this type of financing. This is especially true in Canada. Technological advancement is probably the greatest opportunity for our company and the industry as a whole. I am excited to see how our industry embraces AI, how we can create tools for increased efficiency and accuracy, and how we can engage with our clients in new ways.
One of the biggest stories of 2023 was the finalization and subsequent delay of the implementation of Section 1071 of the Dodd-Frank Act. Importantly, factors were not included in the final rules, but what is your perspective on this continuing saga and its potential impact on the factoring sector, whether via new regulations, new updates to the rules, etc.?
Barrett: Any introduction of regulation at the state or federal level is a threat to the factoring industry. Also, predatory lenders, such as merchant cash advance lenders, cause increased focus on all lending, and lawmakers are then eager to overregulate. The American Factoring Association is the watchdog for the factoring industry and it is imperative factors support the AFA not only with donations but grassroots efforts at the state level. The AFA is closely monitoring regulation that will affect the industry and is a great resource for factors to stay up to date.
Gustaf: If federal regulation excludes factors from Section 1071, that is big win, but we must consider what this might mean for states as they each institute their methods and requirements, as well as how state examiners will react, especially when auditing bank factors. Now more than ever it is important to support the AFA as it continues to reach state by state and educate on how factoring differs from other types of lenders or MCAs.
Salomon: This issue is highly region specific, with some heavily impacted and others not impacted noticeably at all. In California, our governor has targeted alternative financing a bit heavy handedly. We have seen many new regulations in this effort regarding disclosure, reclassification of commercial financing as consumer financing, limitations on yields we can charge and the elimination of ABL fees such as the “collateral monitoring fee.” More regulatory audits are expensive and frustrating. It has been certainly discussed nationally that we are all now lenders, not factors or ABLs. We are going to have to adjust to the “lending” rules that various states enact and figure out how to best navigate updated proactive lending practices.
Shifrin: This is why it’s so important for factoring companies to contribute to the AFA, which works tirelessly to ensure that our industry is represented and heard when lawmakers come up with new and inventive ways to unnecessarily complicate the process and consequently limit small businesses’ ability to access capital. My opinion is that this will certainly not be the last battle that our industry has to fight and I am very glad that the AFA is doing the vitally important work that they do.
What are your overall expectations for the factoring industry in 2024?
Barrett: Overall, I am optimistic. Factors are resilient and able to adapt to a changing environment quickly. Factoring is the oldest form of financing and our industry will continue to evolve and adapt. There are a lot of items up in the air that can cause issues for factors: high interest rates, recession risk, regulation and the upcoming presidential election. High interest rates will continue to be an issue for factors who charge a fixed rate. An increase in the interest rate for a factor’s lending facility reduces margins and possibly causes lender covenant issues. On the positive side, the outlook for a recession is decreasing, but banks are still tightening credit, which will increase the deal flow for factors. State disclosure regulations are continuing to gain steam and more states are introducing disclosure bills. Small factors don’t have the administrative support to keep up with all the disclosure laws, which are different state to state. This could lead to factors reducing the states they do business in and reducing the funding options for small businesses.
Gustaf: Online shopping seemed to be the only method of enjoyment or entertainment during the lingering months of the pandemic. The record amount of travel over the past 18 to 24 months appears to be catching up those who missed vacation opportunities in 2020 and 2021. As we look ahead to 2024, we may see travel hit a peak and this may bring consumers back to more typical shopping and entertainment habits. The supply chain undoubtedly is still recovering from the initial economic disruption and coupled with recent strikes disrupting production of equipment parts and manufacturing of new automobiles, this further slowed the supply of available freight for transportation carriers. Although the jobs market still looks strong, the eligible workforce continues to decrease, which lessens the ability to fill orders in a timely manner. Interest rates have slowed and may fall, but bank turndowns for those looking to increase or open a business loan or line of credit are still out there. This may bring opportunities to transportation and general factoring alike, but it won’t happen early in the year and how an election year will affect spending is still always anyone’s guess.
Salomon: The factoring and lending community is a very resilient and creative group dedicated to doing the best we can for businesses. I think this is the year to add some more technology to streamline our efficiencies, add some quality staffing hires, and really capitalize on being progressive for the benefit of our companies and for the lending needs of our clients. There has never been more money chasing money in the sense of business owners being pursued. It’s a case of the right money helping make a difference and lenders and factors truly being a benefit to all involved. With potentially greater deal flow booked, we need to reinvest, improve and grow accordingly.
I also think we can expect some more consolidation of alternative finance companies. As rates stay higher, more banks back away from “aggressive” lending to conserve treasury, and this, ultimately, will lead to some banks buying more of the ABL lenders for the yield and a place to better place capital money. It also could lead to some of the bigger ABL players buying more of the smaller ones for regional impact and to put their increasing “war chest” into action for continued growth. All in all, 2024 should be a very interesting year in our space.
Shifrin: I have high hopes for the industry in the coming year. I believe next year will be better for most factoring companies. Interest rates seemed to have peaked (fingers crossed) and many believe they will start dropping in 2024, which should bring much needed net margin relief to many factoring companies that operate on a flat fee model. I am hoping for increased transportation volumes, a continuation in the flow of traditionally bankable clients looking for alternatives, and an increase in startups looking for access to capital.