2022 Commercial Factor Year in Review

In part one of a Q&A reviewing 2022 and previewing 2023, representatives from FirstLine Funding Group, Republic Business Credit and eCapital break down the factoring industry’s performance in a largely tumultuous 2022.

How would you describe your firm’s performance in 2022?

Lori Gustaf, FirstLine Funding Group: Despite a slowing economy and sliding freight rates, we found that our customers with a solid understanding of business were able to weather volatility. It was the small owner-operator who jumped new into the transportation business during the rate hikes that could not maintain business continuity as freight compression began in Q2/22.

Rob Meyers, Republic Business Credit: Overall, it was a strong year for growth across the portfolio in terms of both new clients and organic growth within our current client credit facilities. The year has really been a tale of three unique phases for us. The first five months of the year were incredibly strong for both our traditional and recourse factoring. The summer, however, could be summarized as “Out of Office. Please call us in September.” Thankfully, since mid-August, inquiries are up along with a surge in issued proposals and a robust pipeline that has already seen several funded asset-based lending clients. It feels like a welcomed return, described by our underwriting team as almost a more frenzied pace than just a few years ago. 

Marius Silvasan, eCapital: I’m happy to say that this year has proven to be another record year for eCapital in terms of our revenue, profits, size of loan book and client count. We focused on organic growth coupled with strategic portfolio and company acquisitions. In January, we acquired the factoring portfolio of UMB Bank and in May we acquired CNH Finance, which rebranded to eCapital Healthcare. The CNH acquisition allowed us to enter the healthcare lending space with an established book of business and very experienced management team. 

How would you describe the overall factoring industry’s performance in 2022?

Gustaf: Most factors in the transportation space experienced at least a 20% drop in average invoice beginning in the first quarter. We definitely found by summer that the “party was over,” experiencing the first major drop of freight rates in over two years. 

Meyers: It was a tale of two halves of the year, really. The first half saw a lot of growth across the factoring industry, especially in the transportation, healthcare staffing and apparel industries. The second half of the year has seen freight volume reduce dramatically, healthcare staffing cool off and apparel orders come in lighter than expected despite strong consumer demand. 

Silvasan: We were encouraged by good market conditions at the start of 2022, but challenges quickly emerged. Of the more than 80 different industries eCapital has expertise in, we’ve found that one we are very active in — the transportation and logistics industry — is frequently a leading indicator of economic activity. It has been under pressure with declining rates and excess capacity. Shipping rates were substantially higher during the pandemic, led by supply chain shortages and disruptions, but now rates are coming down and the supply chains are mostly refilled. This has led to excess capacity and pain for primarily smaller operators. The factoring industry as a whole has had to deal with rising interest rates that are putting more pressure on margins already impacted by high inflation.

How have economic fluctuations like inflation, rising interest rates and supply chain disruption affected the industry?

Gustaf: It is definitely harder for the small business owner to make ends meet with their average invoice being cut as much as $500 compared to the beginning of the year. This actually makes it a good time to turn (or turn back) to factoring if they went away from it during the peak rates. 

Cash flow is tighter now at the debtor level as well. Pay trends are stretching out again to 45 or more days on average. The independent carrier may not be able to wait more than 30 days for payment as they were a year ago. The owner of a small trucking company may have taken a break from the road and stayed in the office while rates were elevated. They likely expanded their business with additional equipment purchases while adding drivers, shop and office staff and now find that they are having a hard time meeting those equipment finance payments and paying their drivers immediately upon delivery. Those owners are having to get back in the trucks themselves to reduce expenses. 

Now is the time these small businesses should look back to their previous factoring partners to cover the back-office duties so they may cut staffing costs as well as other office expenses and put the daily burden of debtor credit analysis, billing and collections on their factor.

Meyers: Here is my best attempt at being an economist. Inflation has increased costs, decreased revenue and will eventually reduce consumer demand. Said more concisely: Shorter-term inflation gains likely will be reduced in the long-run economy unless labor and wages can keep pace. Historically, wage earnings significantly lag inflationary increases.

Rising interest rates could have dramatic impacts on fixed rate factoring or discount pricing structures often found in the transportation sector. Republic, like many, has floating rates with Prime or SOFR that move in line (typically within 30 days) of market interest rate movements. I worry about the impact of rising interest rates on lower margin clients where that less than 5% operating margin could be eliminated quickly from any handful of rising costs that small business owners are facing. You can see the dramatic impact on the housing industry as it adjusts to the doubling of mortgage rates.

Supply chain issues have calmed in the second half of the year, but many feel it isn’t over yet. Feel free to ask me after the Lunar New Year to update my answer on the supply chain front, but the challenges from the intersection of rising interest rates and inflation seem to be just getting started.

Silvasan: The primary market eCapital finances is SMBs, and it’s not an easy time for them; the majority of our clients’ profitability is being significantly affected by inflation and higher interest rates. We have seen positive improvements in the supply chain over the last six months, but high inflation continues. These higher interest rates represent a substantial headwind for SMBs. We expect the economy to slow and enter a recession in 2023.

How has your company dealt with these economic challenges?

Gustaf: The biggest challenge for many transportation factors right now is meeting those immediate cash needs over and above the factoring of freight invoices. Our clients are not only looking for funding on delivered invoices, but they need assistance with fuel advances to get from point A to point B as well as additional funds in an “over-advance” to assist with insurance and licensing and to catch up on past due equipment loans and other operational expenses. We have been receiving requests for additional financial assistance more and more in the last 60 days than we had seen in quite some time.

Meyers: Entrepreneurs and small business owners often adapt quickly and focus on what they can control. We have been more proactive with client visits, requesting projections, updating appraisals and increasing the client review frequency where we spot any negative trend lines. That might be related to profits, cash flow, margins or simply a growing pile of inventory in relation to their revenue. 

Silvasan: As a specialty lender that operates a financial technology platform, we utilize technology to actively manage client and debtor risk. In recent months, we have increased confirmation and collection activity and are more closely monitoring changing debtor payment behavior. In anticipation of a further economic slowdown, we have adjusted industry concentration levels while continuing to consolidate operations and centralize our acquired businesses under a single platform.

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

Gustaf: Most transportation factors knew that rates would not stay elevated forever, but what surprised us the most at FirstLine was the steep drop rates took in literally a few weeks’ time.  Almost immediately, carriers started parking equipment and many without notice to their factoring account executives. More than ever, the risk of claim or paperwork issues increased as carriers quickly became unresponsive to calls and emails, meaning our collections team has to be on point at all times. Secondly, times like this lend to “desperate times creating desperate measures” for some carriers.  Additional auditing and verification methods needed to be put in place to mitigate the fraud risk on new billing invoices.

Meyers: The rapid speed of several rising costs all facing our clients at the same time, starting with raw materials, labor and increased interest rates intersecting. The first step is always increased client communication, whether that is through formal visits or casual chats at the various tradeshows. For example, we visited our largest 30 clients in the past two months to say hello, break bread and/or provide credit amendments where necessary. Stronger client relationships are essential as we work together with our clients through whatever 2023 may bring.