Trends in Turnarounds: A Factoring Industry Perspective

Written by: Ken Yager, MBA, CTP, Newpoint Advisors

In the world of commercial finance, turnarounds are not new. But as we face a confluence of economic pressures, the volume, complexity, and speed of business distress are all accelerating. For factors, this isn’t just an observation; it’s a call to action. We are in the early stages of a rising wave of commercial bankruptcies, dissolutions, and distressed events across a wide swath of industries that will impact factoring.

This article provides a lens into current turnaround trends from the unique vantage point of the factoring industry. Drawing on case insights and patterns, it highlights key sectors under stress, ever-present risks such as Merchant Cash Advances (MCAs), and practical strategies for when and how factoring companies can intervene with turnaround professionals on prospects and portfolio companies.

Industry Trends

Let’s start by talking about which industries look most vulnerable. Data and anecdotal experience suggest rising distress in multiple sectors:

• Manufacturing: Cost inflation, labor shortages, and demand uncertainty are squeezing margins. Inside manufacturing, the longer and more complex the supply chain, the worse the impact will be. Regardless of the outcome of tariffs, these industries will go through yet another vast restructuring as they did with the 2018 tariffs and the COVID supply chain waves. Large infrastructures like international supply chains do best in calm waters. Uncertainty causes shortages and oversupplies that threaten actors up and down the supply chain.

• Wholesale product companies will feel the same pain as from the swings in tariffs. Prices will go up, and there is a bit of euphoria, and for the last few months, these companies have been accelerating purchases. But as consumer demand drops out, it does not matter how much you charge for products; the demand will not be there.

• Transportation and Logistics: Insurance costs, compliance burdens, and rate volatility are challenging cash flow consistency. This industry is still not out of the woods from the COVID impact, and now a slowdown in world economic markets threatens another round of downward pressure, maybe mixed in with higher interest rates – stagflation. One could argue that the bump in transportation the last six months will turn out to be “transitory”.

• Professional Services and Staffing: Quietly in the background, the higher margin service firms have survived the COVID-driven “resignations”, followed by Fortune 500 belt-tightening that led to wholesale contract cancelations, followed by AI replacement trends for their work, and finally, a federal government cost reduction exercise leading to firm collapses. This industry segment has never seen this level of bankruptcy. If a recession hits, consumer-facing financial services and call centers are next if AI has not already replaced them. A recession would bring in the specter of light-industrial staffing reductions as well.

Risk Manifested

You cannot write an article about turnarounds for the factoring industry without addressing Merchant Cash Advance problems. Ignoring the litany of legal concerns, MCAs create an interesting timing issue for factoring companies when they come up in your portfolio or with prospects. What often happens is MCAs are discovered eating away at a company, and a series of legal questions start. And while the legal community does an excellent job of addressing MCA standing, it does not constitute a complete turnaround solution. The biggest issue is that MCAs are cash dilutive, and that trajectory can be severe. Time becomes everything.

To that point, one issue that has emerged with MCAs that alarms me is that “no” does not mean “no” and the risk of half measures – factor funding  while finger wagging, working with an MCA (the person that broke into your house), overadvances without consequence (the fees are great), and a "good enough" co-existence plan don’t work. What is needed is an immediate stop to the drainage of cash. This means that on the same day you are aware of an MCA (in a prospect or in your portfolio), action needs to be taken to halt the MCA degradation. It seems harsh, but outside the factoring space, this is the standard operating procedure for addressing the problem. 

In an ever-more technological world, one of the best forms of cure for MCAs is an old-fashioned analog operational intervention that stops the illegal cash outflow and sets up boundaries to protect the client collateral. This is what a turnaround professional can do. A turnaround professional is also able to help a client repair its operational issues that led to the bleed and the eventual MCA arrival. Reversing the need puts a clear and actionable strategy in place. Further, a client who is willing to make themselves better is one that you want as a client. The one that will not make amends is your future boat anchor.  

Self-Inflicted Wounds

Let’s put that into perspective. Below, we review how that process for success works and how some factors have missed the opportunity.

Not only are there operational issues that a turnaround professional can help a distressed company execute, there are restructuring options as well. There are 16 different ways to sell a distressed company, providing many different ways for factoring companies to exit troubled situations. The list is extensive, and I will save that for another article. As long as that list is, there are scores of actions a turnaround professional can execute when a client does not see options. However, these options are only as good as the team that executes them – and I am not talking about the turnaround professional.

After over a decade of working with factoring companies, here are some observable places where factoring companies have defeated themselves. The factoring industry's main habit or self-limiting behavior in turnarounds is treating the threats as “Wants” vs “Needs”. As a factoring company, you have huge amounts of leverage over an entrepreneur who is struggling and threatening you. When you tell them “you need help,” but they are defiant to the point of taking on MCAs, you are really in a “Need” category of relationship – the client needs help beyond what you have the time or energy to deliver. The next issue is understanding when a turnaround professional is warranted vs just a cash flow coach vs it’s time to say a prayer for the entrepreneur and move on from the client. The trick is using this strategy to not get deeper into an intractable situation.

Step 1 – Upon finding a problem like an MCA or excessive overadvances, you direct the client to seek help by x date. Usually, two weeks. You inform the client that not doing that jeopardizes your ability to fund.

Step 2 – If they do not act accordingly, you inform them that their next funding will not happen. Upon the next infraction, you make your funding available one day late (in the case of payroll) or one day after the deadline for other third parties – including government agencies.

Step 3 – If they have not taken the message (and you cannot find a greater fool to take you out), the next funding request is delayed one week from the deadline. Eventually, the situation gets too hot, and they get the message. Some clients will turn to another MCA. Be sure you are watching for deposits and swipe the funds when they become available. You have arrived at DACAs at this point, and you should control the high risk of a repeat offender.

Step Bonus – If you are dealing with a prospect that is into MCAs, you will make your term sheet conditional to them signing up with professional help. The professional can be paid and start after you fund, but everyone is on the same page about the relationship.

Ripped from the Headlines

Speaking of relationships, here is the factoring industry's second bad habit as told through case studies. It is the story of consistency and true communication.

Let’s take a look at examples to make a point about good, bad, and ugly in the world of factoring. One truth about distress is that trust between the factor and their client has been damaged. Successful consulting finds a path back to trust that both parties can live with day-to-day. Because every company problem, the data related to it, and the needs of the factoring company are unique, the path to trust requires an experienced hand. During the consulting process, the rebuilding of trust requires all parties to communicate good and bad news, learning the language of what is fair and reasonable communication (that cuts both ways), the timing of that news (bad news never gets better with time) and how to demonstrate a clear understanding of the business that goes beyond an owner’s typical zealous selling of disparate datapoints.

Here are the examples of what is called the triad issue

Wholesaler – Good Example. Factoring put in the turnaround professional to build a cash follow model.  Factor required the model as part of its communications. The client tried everything to make the process difficult, but the professional kept finding useful workarounds that the company could use, and the factoring company accepted as useful information. The borrower eventually acquiesced, adopted the cash flow planning concept on data it could manage, and got on the phone weekly to talk about the real numbers in the business. They were able to work with the factoring company on growth and build the relationship

Commercial Landscaping – Bad Example – Factoring company was introduced to a client as part of a deal to remove MCAs. The initial transaction worked very well. The factor and client got along well, and the factoring company took the lead in the relationship with the client. The turnaround professional could see that the relationship was building but was concerned that the client had not shed their bad habits and did not have the information to explain themselves. Encouraged by the factoring company that the relationship was solid with the client, the consultant exited. Six months later, a panicked phone call came to the consultant as the client had drifted back to old habits, dropped the cash flow planning they had learned, and, as a result, had put the factor in an overadvance position that started to look permanent. The consultant did get involved, but the relationship never took on the triad configuration of all parties talking as the client kept trying to exclude the consultant from important communications with the factor. The factor’s overadvances continued to climb as a result until only the worst-case scenario – a painful liquidation occurred for both parties.

Staffing – Ugly Example. There are times when the triad conversation is not going to work. If a client is set on deception, there is no way to coerce them back to an open communication process. Likely, their paradigm of how relationships exist is broken. A staffing company had borrowed all it could and had some overadvances from time to time, but in a moment when the factoring company put their foot down, the staffing company ran for the MCAs, and they ran hard. The factoring company got control of the relationship, or so they thought. Their gut said something was not quite right, but while everyone was getting along, they asked a turnaround professional to put a cash plan together with the company. That exercise showed where the leak was coming from. The staffing company had “bought” its book of business by ignoring IRS payments, leaving everyone highly exposed. The staffing company would not take on the cash flow planning to make a recovery and went further to deceive all parties. The turnaround professional was able to share this information but not make any corrections to attitudes. At that point, only liquidation was an option. Fortunately, the factor had been able to prep for the issues and reduce its losses before the crash hit.

Next Steps

The current economic environment is going to create problems for businesses, and some industries are already showing signs of wear and tear. Getting an early start on distress is the strongest medicine for saving a good relationship that is on the rocks. However, the process requires not only timing but also moving the posture of the factoring company from wanting a fix to a required need to fix it and finally leveraging standard postures from other financial industries the use third parties to rebuild the conversation around your factoring capital that puts both parties in a place where they can understand one another. Just hiring a consultant or just getting a plan in place is table stakes. A good win for a factoring company has timing and follow through on being tough but then opening up to a conversation that meets the entrepreneur where they are in terms of understanding their business and speak finances. Building that bridge takes deliberate speed and steps.   

About Ken Yager, CTP

Ken Yager, CTP is the founder and President of Newpoint Advisors and has 25 years of executive leadership experience in stakeholder communication. He has worked with clients in a variety of industries in over 150 engagements. Ken regularly takes on profit and loss and risk-management responsibility for cash-constrained companies in growth, leveraged-buyout and turnaround situations. He also has successfully worked on implementing hundreds of initiatives involving, operations and project management, team building, marketing, and sales and joint-venture management. He is a fierce advocate for capital preservation and saving jobs.

The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.