How Factoring CFOs are Protecting the Financial Well-Being of Their Companies in 2023

In a year of rising interest rates, inflation and bankruptcies, much of the conversation in the factoring industry has focused on how such economic uncertainty is affecting clients, but factors themselves must contend with market turbulence. To get a handle on how some finance leaders in the industry are navigating their companies through the storm, Commercial Factor spoke with Amity Mercado, CFO and COO of nFusion Capital, and Matthew Stassie, CFO of Breakout Capital, to learn about their financial priorities and strategies, the availability and cost of funds, and more.

What have been your top priorities to ensure financial wellness for your company this year and why?

Amity Mercado: One of our priorities is constantly assessing our portfolio to look for potential problems so we are ready to address them. To ensure financial wellness, managing participations with other capital providers and managing risk has been our top priority. We have set a threshold we won’t extend over to manage risk and we have reached out to participants to come in and share the risk of a deal, as well as the potential rewards, so that a single deal does not put nFusion at jeopardy. A looming recession and bankruptcies are always a concern.

Matthew Stassie: Throughout the year, our organization has been dedicated to achieving financial wellness through the pursuit of two fundamental priorities: 

First and foremost, we have been laser focused on securing debt financing to support the growth of our on-balance sheet portfolio. We were able to achieve this in June by securing a $45 million credit facility, which will allow us to fund the growth of our factoring and term loan products, and the interest savings provides us with the flexibility to provide better terms to our clients and win competitive deals.

The second priority we believe is imperative to the success of any business is the proper management of cash flow. Therefore, we have remained steadfast in our efforts to maximize the amount of cash we are able to utilize towards generating revenue. We do this by actively monitoring the pace of cash receipts, being proactive in collections, accurately forecasting our funding pipeline in order to minimize cash drag in our credit facilities, and rationalizing vendor relationships and negotiating favorable payment terms. The more efficient we are in these areas, the quicker we're able to redeploy capital and minimize cash drag.

What has been the most difficult challenge for your company this year and how have you approached it?

Mercado: nFusion’s most difficult challenge has been managing the benefits of participation in terms of shared risk versus the increased cost of participation funds. It’s a see-saw effect. In each case we were asking ourselves: Do we mitigate risk at the expense of the cost of the funds? Is this the right move to make? To solve that, we developed a limit. Any deals that come in over that limit, we deem worthy to participate out to share the risk.

For our clients, the biggest challenge is still the post-pandemic port backup and supply chain issues in getting products on their shelves. Without adequate products on the shelves, some clients lost contracts. We had an increase in debtors wanting to protect themselves by over-ordering so they would have backup inventory, but that has now resulted in a slump in sales because they overordered.

Stassie: Our most difficult challenge within the finance function has been enhancing our systems and processes to improve the timeliness and accuracy of our portfolio performance reporting.  Utilizing a new credit facility means that we must adhere to new reporting requirements, eligibility criteria, concentrations and covenants. Reporting on these items entails sourcing and combining data from multiple systems, which all must be reconciled back to a source of truth.  Therefore, we've invested significant time and resources to ensure data integrity and accuracy in near real-time across systems. This gives us the ability to monitor portfolio performance and composition in close to real-time, which not only helps us comply with our various reporting requirements, but also provides business insights that may lead to changes in pricing, products, underwriting policy, etc.

How has the economic tumult of 2023 affected your company’s cost and availability of funds?

Mercado: I don’t feel that the availability of funds has been affected, but the cost of funds have definitely been impacted by this year’s economic tumult. Even though our bank line is still the cheapest money available, it still goes up every year.

In addition, if the bank deems an asset or a company ineligible, we cannot use our bank line of credit to factor that deal and must cover that investment with our sub debt and our equity. We have to decide on a case-by-case basis if the company is worth the investment to go out to market and get additional funds. And participation funds are always more expensive because they are private equity funded and they charge more for funds because they are not a bank.

Stassie: Fortunately, we haven't been significantly impacted by this year's economic tumult. In fact, we have seen one of our strongest years yet in terms of origination volume. As of July, we have successfully funded more than $100 million in loans for small businesses this year alone.

Despite the heightened inflation and instability that has followed recent bank failures, our company has been able to maintain its competitive edge by actively seeking out and capitalizing on business opportunities. Specifically, we have noticed that many banks are taking an increasingly cautious approach to extending credit, which has created a significant opportunity for our firm to provide vital financial support to businesses that might otherwise struggle to access the funds they need.

What is your outlook for the factoring industry for the rest of 2023 and into early 2024? 

Mercado: As I follow the trade press, many experts are still predicting a looming recession with potentially more bankruptcies, additional layoffs and the resulting fallout. As a result, banks are tightening their credit box, and that creates opportunity for the factoring industry and an uptick in our pipeline. But we have to be careful and conduct our due diligence with bankruptcies on the rise.

At nFusion, the beginning of the year was slow, but recently we have experienced a big uptick. I am much more positive about the rest of the year and I’m really looking forward to 2024; I think it’s going to be a great year as we regain traction. 

Stassie: The industry’s technological advancements and growing demand for alternative financing solutions are two key drivers of expected growth heading into 2024.

The use of machine learning innovations has enabled factoring companies to process invoices more efficiently, reducing transaction times substantially. As a result, businesses can now access funding more efficiently, enabling the overall industry to scale faster.

In addition, the growing demand for alternative financing solutions will start to slowly play a role. We are already seeing the deleveraging of traditional banks, the growing need for streamlined credit solutions and the incapacity of conventional funding sources to deliver them.  The funding gap for small businesses continues to expand and factoring businesses are qualified to fill the gap.