2021 Commercial Factor Outlook

As factors close the book on a year mired by the COVID-19 pandemic and get ready for 2021, Commercial Factor reached out to industry leaders from across the United States to take stock of current market conditions and predict what could be the next big disruptor for the industry.

There is no arguing that the COVID-19 pandemic was the biggest disruptor of 2020 for the factoring industry and the world at large. The pandemic has stretched through most of the year and although the recent approval of a vaccine provides some optimism, the fallout will carry into 2021 and beyond.

To get a better handle on where the factoring market currently stands and where it will go in 2021, Robyn Barrett, managing member of FSW Funding; Bonnie Castillo, president of CoreFund Capital; Dean Landis, president of Entrepreneur Growth Capital; and Glen Shu, president of the specialty finance group at Heritage Bank of Commerce/Bay View Funding share their insights in an exclusive Q&A for Commercial Factor.

How would you describe the state of the factoring industry entering 2021?

BARRETT: The factoring industry is set to have its best life ever. Merchant cash advance lenders were seriously hurt due to COVID, which means less predatory and destructive lending. Also, in the first half of 2021, banks will be re-evaluating their portfolio[s] and will be eager to shed under- and non-performing loans. Factors are in a good position to pick up this business from banks.

CASTILLO: Anxious. Everyone knows there is no playbook for what has occurred this year and how to prepare for 2021. The ripple effect and impact of the shutdown of many businesses due to the pandemic is still making its way through our economy. Our factoring business is focused on the transportation and oilfield market. Transportation will continue to be a necessity. The concern is the survival of the account debtors and the potential of seeing more bankruptcies. The oilfield is of course on the bubble during this. On the upside, there are many factoring shops that have been able to adapt to the situation at hand by embracing more technology to maintain a continuity within their organization with no interruption of service to their clients. I think that will continue to be a requirement for factors moving forward.

LANDIS: The industry is surprisingly healthy. It appears that we all weathered the storm about the same: the initial shock and “all hands on deck” spirit, the unprecedented drop in outstandings, followed by a gradual increase to levels pre-pandemic. We currently see as much competition as ever, although it is from existing players; new entrants seem to be attracted more to ABL not factoring.

SHU: I would describe the state of the factoring industry for 2021 as being cautiously optimistic. I think there will be new business opportunities for factors and other specialty finance companies that will be driven by demand from businesses who have survived the pandemic, and in some cases, actually thrived from newfound opportunities. But that being said, the cautious part of being optimistic is that we must continue keeping a watchful eye on our portfolios, with even more focus on credit quality.

What is one change adopted by the factoring industry in 2020 that you believe will become a fixture going forward?

BARRETT: Working remotely. Whether you like it or not, this can of worms has been opened up. Factors are flexible in nature and were able to move to a remote workplace with little pain. I think going forward we all will be providing some mix of in-person and remote working — it is inevitable.

CASTILLO: Embracing more technology and automation. I have heard personally from prospects that have had the unfortunate experience of being with a factor that was not prepared to pivot their business so quickly to maintain continuity.

LANDIS: Working remotely worked far better than I expected. We learned to adapt quickly and successfully, something that I don’t think our industry has been known for. We will take these lessons to heart. The one area that I have renewed appreciation for is the value of relationships. Inasmuch as we all learned to work in new ways, it was much more difficult to create new relationships. This put a premium on all existing relationships between colleagues, clients, funding sources, referral sources, etc.

SHU: Increased use of technology and the virtualization of our quote-unquote back offices. I’ve always been a believer that the portfolio and credit side of the business should be all under one roof because there we can leverage synergies and promote ongoing staff education. Now, with that being said, COVID has forced the world to figure out how to work remotely. We learned quickly that you can still perform transactions, service clients and do everything you normally do in the office from remote locations. We’ll continue [to] see businesses having less people in the office and more people working from home or wherever they choose to.

COVID-19 was a disruptor very few could have predicted before 2020. What do you think will be the biggest disruptor of 2021 for the factoring industry?

BARRETT: The constant threat of another virus such as COVID-19. This virus shook the entire world and brought the U.S. to its knees. All factors are looking for prospects that will thrive in our new normal — online commerce, healthcare, PPE and government contracts. The other threat is regulation, but this will be tempered if the Republicans can hold the Senate.

CASTILLO: I think we risk seeing more unfriendly legislation toward factors and higher interest rates. This could impact many factors that have competed to be the lowest rate provider who will either not survive or lose much of their portfolio over rate increases to current clients.

LANDIS: Fears of any sort of cybercrime still keep me up at night. We still need to watch closely the fintech players that encroach on the factoring space and on attempts to increase regulation.

SHU: COVID may continue to be a disruptor in 2021. There could be potential problems with distribution of the vaccine, which could in turn cause further delays in progress with moving the country forward and slowing economic recovery.

Which sectors do you expect to recover or continue to recover in 2021 and which ones do you expect to continue to struggle?

BARRETT: Apparel will continue to struggle for a while. We shall see how the holiday season plays out and then who files bankruptcy in the first quarter of 2021. One thing is for sure, the competitive landscape in terms of retail and wholesale will be much smaller. Oil and gas will also continue to suffer due to COVID-19 uncertainty and under the new president-elect, who is climate-conscious. The winners will be staffing, healthcare and construction.

CASTILLO: Fortunately for us, the trucking industry will continue to exist and quite possibly continue to thrive into the first quarter, which historically is the slow season. Last mile delivery in the transportation industry will continue to grow as consumers have now become accustomed to more on-demand online ordering options. I’m hoping that there is not more government interference or restrictions placed on carriers. I think brick and mortar retail will continue to suffer if they are unable to expand online options.

LANDIS: I imagine a broad recovery, except for businesses that require the in-person experience: hospitably, travel, certain retail and restaurants. Trillions of additional stimulus and a large infrastructure bill could be great for basic industry and the building trades.

SHU: It’s probably easier to talk about those that I think will continue to struggle versus those that will recover. Brick and mortar retail is going to continue struggling, although it had been before the pandemic but then got worse. I believe the energy sector will continue to face challenges. On a daily basis, we closely monitor corporate bankruptcies for purposes of maintaining credit quality. Over the years, we have pulled back some from the energy sector, especially when we saw the significant declines in the price of oil. But clearly through the pandemic, the energy sector continues to be somewhat challenged, enough that many of the bankruptcy alerts we see are related to this industry. As the country reopens and businesses begin seeing more normal operations, we should see recoveries in industries such as manufacturing, wholesale and distribution.

What are your overall expectations for the industry in 2021?

BARRETT: It is a mixed bag depending on when the vaccines are distributed and how fast people will get them. The economy won’t start a real recovery until people are spending money, employed and can travel.

CASTILLO: I’m trying not to set too many expectations at this point. Our focus is on continuing to grow our portfolio wisely (we grew substantially during the pandemic), manage our risk and be prepared and nimble enough to adapt to any additional disruptors.

LANDIS: Barring anything apocalyptic, we are hopeful for a robust 2021. I think we all can’t wait to return to normal and enjoy all the in-person contact that we may have taken for granted. One item to note is that a lot of factors benefitted from the reduction in the MCA industry. My guess is that they come back as before.

SHU: I believe 2021 should provide plenty of new business opportunities for the specialty finance industry, which in turn should support moderate growth within our portfolios. I also think that there’s going to be an increase in the mergers and acquisitions activity for those companies looking to expand beyond organic means.

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