Still in the Woods: Strategic Insights from 2020’s Factoring Trends
Bill Phelan of PayNet and Jeff Jones of Ansonia Credit Data provide a visualization and analysis of the ups and downs of the factoring world this year. They see an interesting correlation between bank lending and factoring in the time of COVID-19 and the Paycheck Protection Program while certain states show greater risks of default.
BY BILL PHELAN AND JEFF JONES
According to PayNet’s October 2020 Small Business Lending Index, after a stronger-than-expected rebound this summer, the longerterm scarring effects in the labor market are becoming increasingly apparent. Since April, permanent job losses have increased by 1.8 million — half of which occurred in August and September — and several large companies have announced plans to lay off employees in the coming months, including Disney (28,000), American Airlines (19,000) and United Airlines (13,000). Additionally, while consumer spending rose for the fourth straight month in August, it remained 3.4% below its pre-COVID-19-pandemic level.
REGIONAL STORY - Small business lending contracted in eight of the 10 largest states, with Pennsylvania and New York experiencing significant declines compared with a year ago.
INDUSTRY STORY - Small business lending improved in five of 18 industries, led by public administration and construction, while the largest declines were reported in education and mining.
Nonetheless, there are some positive developments worth noting. Despite concerns about the coronavirus in the coming winter months, a recent Comcast Business survey found 78% of small and mid-sized businesses are at least somewhat confident they can handle a surge in cases this fall/winter.
THE PANDEMIC: A BOON FOR ENTREPRENEURS?
Separately, a recent Wall Street Journal report highlighted how the pandemic has been a boon for some entrepreneurs as new business applications among likely employers are at their highest point in a decade. While many small businesses are managing to hold their own (and some are thriving), according to the Census Bureau’s Small Business Pulse survey, 8.5% have either permanently closed or do not believe their operations will ever return to normal, and nearly half believe it will take more than six months for business operations to normalize.
Based on PayNet’s Absolute PD Outlook — a forward-looking probability of default model — the map on the next page predicts states that have the highest probability of defaults on business loans within the next year. AbsolutePD Outlook uses millions of forecasts on individual businesses that PayNet calculates with AbsolutePD. These individual business forecasts are aggregated by four-digit NAICS for each county in the United States. PayNet models these forecasts across the census count population of businesses such that there is a default forecast available for each county where one or more businesses exist in any fourdigit NAICS sector.
A RISE IN DEFAULTS IS PREDICTED
Loan forbearance and the PPP have helped small businesses, but these are only temporary solutions. Without a vaccine to fight new waves of infection, expect double digit default rates of bank lending and commercial leasing in hard-hit sectors, including hospitality, food service and retail. Business owners are hard pressed to stay open while piling up more debt when a timetable for future repayments looks uncertain. Financial relief remains a critical need for many small businesses. A September Goldman Sachs survey found that without additional financial relief from Congress, 36% of small businesses will begin to lay off workers soon, while 30% will run out of cash reserves by the end of the year. Additionally, although there appears to be substantial bipartisan support for additional targeted small business relief, negotiations in Washington have been unsuccessful thus far. As long as the uncertainty continues, there will be increased opportunity for factors to provide funding to existing companies in need of immediate financial relief, and to look ahead to fund newly emerging enterprises to come given the entrepreneurial mindset of factors.
To view the corresponding graphics and charts for this article, view the PDF version of the issue here.