Commercial Factor Q&A: Oscar Rombolà Provides Perspective from the Canadian Factoring Industry
The factoring industry in Canada has faced numerous challenges as well as opportunities in the last year, with some shared with the global factoring industry and others unique to the country itself. To break it all down, Oscar Rombolà, managing director of eCapital, shared his observations in an exclusive Q&A.
Broadly speaking, how has the factoring industry fared in Canada in 2021? How does that compare with previous years, both before and during the COVID-19 pandemic?
Oscar Rombolà: We all agree we are navigating some unchartered waters when it comes to this type of crisis. For those who have been in the industry for as long as I have, we dealt with recessions, economic downturns, slow periods during the year, political crisis, but the COVID pandemic has touched us all at so many different levels. Our personal lives have been affected, our families, friends and co-workers. This is a health crisis with economic ramifications. This is a global crisis.
In the past, we were able to pivot if the markets were changing. We would consider other industries, regions, risk levels, etc. This time, we were confronted with a severe uncertainly. Every single department in our companies is under “alert.” Sales, underwriting, operations, legal, IT. We needed to rethink our procedures and adapt. Technology became the only way to survive and thrive. If your company was not utilizing technology, the learning curve had to be done quickly and efficiently. Sales departments needed to adapt: no more in person meetings, goodbye golf days, trade shows and business luncheons! Documentation had to be digitally signed and the corresponding software implemented and users trained. Submission of invoices was expedited. A total restructuring occurred while keeping things going. Risk assessment and portfolio concentration were reviewed daily. Fraud and bankruptcies were in high alert.
Factoring companies dealing with niche markets such as transportation, staffing and medical supplies like personal protective equipment and even Cannabis faired way better than manufacturing, service industries and retail. IT services companies and cybersecurity companies have exploded and grown at a higher rate.
Due to the current government assistance programs and rent subsidies, many companies have found a certain precarious equilibrium sustained by the economic aid. Initial economic forecasts continue to be proven wrong as this tectonic shift accommodates the new reality. There is lots of money in the market and traditional institutions are happy to relax lending practices to support business. Interest rates are at the lowest they’ve been in a long time. These kinds of stimuli benefit companies which otherwise would be filing for bankruptcy.
Insolvency rates across Canada have dropped 28.7% in comparison to last year. There is a decline in bankruptcy proposals as well as many company owners considering closing down their business and settling their debts. This may very well be the calm before the storm, as subsidies may end by Q4/21.
Factoring has traditionally provided a sustainable financing resource in times of crisis. 2020- 2021 has proven once more that companies with healthy balance sheets and sales can benefit for a steady demand of products. Factoring allows them to prosper as they produce invoices, working with their own money.
Pre-COVID, Canada had experienced the amalgamation of smaller factoring companies via mergers and acquisitions. Factoring fees have been adjusted as competition becomes fierce. More and more we are seeing 100% advances, flat fees for 90 days, no factoring agreement and a use-as-you-go attitude, making it easy, efficient and professional for the client. Technology has made an impact in the industry and fintech companies are beginning to increase their presence across the country.
How has Canada’s attempts to deal with the COVID-19 pandemic affected the factoring industry in the country? Have the effects been any different than what has been seen in the U.S.?
Rombolà: At the beginning of the COVID-19 pandemic, factoring companies in larger cities across the country found themselves having to reformat the way they run business. As mentioned, the first wave hit us hard. Everything we knew had to be reviewed. As in any crisis, creative minds found ways to adjust and incorporate new systems and protocols. But there was also the personal toll on the employees’ families and the personal circumstances around working from home. As vaccination programs expand, not at the levels of the UK and the U.S., Canadians are beginning to see the light at the end of the tunnel. The subsequent variations on this pandemic [are] making it hard to predict the new future. The Canadian economy is still very much robust with modest growth.
Generalist factors found a severe halt on new business and many were told by their clients that their cash flow had improved due to financial aid. Portfolios shrunk, but bad debt has not necessarily increased. Most factors have taken a step back to review and assess risk on the accounts and develop strategies to monitor risk and fraud. Some factors have ventured in other industries, even the cannabis industry and its suppliers. Each province has a bit of a different approach to cannabis, but the government-controlled industry assists factors with payment terms, etc.
What have been some of the major non-COVID-19-related shifts (if any) in the Canadian factoring landscape over the last year, whether they be due to M&A, changes in demand, etc.?
Rombolà: In comparison to the U.S. market, Canada is much smaller, but, nevertheless, the acquisition of Bibby Financial North America by eCapital created a shift in the industry. eCapital has acquired companies across Canada and the U.S. in the last two years. There are other smaller transactions and amalgamations of factoring companies due to the retiring of principals, or factors looking to access better lines of credit based on their capital structure volume.
I know that factors in the U.S. are concerned about new and developing regulations for the commercial finance industry, specifically those related to Dodd-Frank. What does the regulatory landscape look like in Canada and what should factors doing business in the country know?
Rombolà: Factoring continues to be an unregulated industry in Canada. There seems to be no interest in the federal government to get involved in the alternative finance landscape. Check cashing companies have been affected in the last few years and some of the regulations had to do with usury rates. Merchant cash advance companies have been experiencing a severe slow down due to the malaise in the retail industry but not necessarily due to legislation.
Some provinces have taken a more regional approach to factoring and alternative lending. In Saskatchewan, for example, the Worker’s Compensation Board (WSIB/WSB) has included factors, as providers of working capital, as liable for clients’ payments of premiums. Different provinces may have issues regarding in-person, notary-based document signatures, etc.
What is your outlook for the factoring industry for the rest of 2021, both in Canada and more broadly?
Rombolà: Uncertainty is what we hear from our factors. We will continue to develop new business, tighten underwriting procedures and be vigilant about fraud. We will also improve our systems and pay attention to our employees, their needs and mental health, and maintain the company’s culture.
These times have proven how important a company’s culture, vision and its people are. We do not build our organization alone; every single associate is extremely important. We are navigating new waters; we will hopefully succeed. We will get up every morning and face the world. There are plenty of opportunities, we just have to find them with a creative mind and openness!
How do you see the industry evolving in the next few years?
Rombolà: Mergers will continue. Niche markets will be developed for factoring. Specialization is key. Technology will challenge us all. Cost of money will be essential to compete. Service, service, service will be important.