For most banks with specialty finance groups the answer is no for several clear-cut reason, but it is not that simple of an answer for all banks with specialty finance divisions. This question is being hotly debated at the lower end of the market as many non-banks have successfully utilized one business development (BDO) team to sell both products.  Utilizing one BDO team to sell two products can work when there is a similar borrower profile that could dictate the credit going either way and a credit and portfolio team that is well trained in both products.  Good BDOs, both bank and non-bank alike, can use product, pricing and market flexibility to their advantage while utilizing one central back office for underwriting and portfolio management.  Why then do banks keep these groups separate?  The reason most banks don’t and shouldn’t combine ABL and factoring groups is that for most groups the underlying businesses, facility sizes, sourcing channels and credit risk are significantly different enough to merit separate divisions.

This gets back to the premise of the article of whether banks should combine these groups.  If a bank-ABL group has an average ABL facility of $20 million vs. an average factoring facility of $2 million then these groups should clearly be separate as there are literally no synergies in originations, underwriting and portfolio management. From a credit perspective, you are also talking about the difference between a collect-out in factoring vs. a work-out in ABL.  In this instance, the ABL PM team clearly envies the factoring account managers as ABL work-outs take their toll.  Very different portfolio outcomes for what are typically very different borrower types.  The difference in portfolio management groups for both products should not be underestimated given ABL deals are typically more complex.  It’s not obvious, but to succeed a bank would need to have the right credit managers/account executives that have experience in both platforms. This is yet another reason why most banks created two entirely separate groups for each product as originations, credit and PM warranted specialized teams.

Where it gets confusing and, frankly, conflicting is when  both the average ABL and factoring facility size narrows to say $5 million. Here is a situation where both BDO teams might be selling separate products from the same bank to the same business from the same referral channel!  Yes, this has happened and is bound to happen when you have groups diverge on cross-over credits that could go either factoring or ABL. The cross-over credits do present the unique time where credit and portfolio management skills converge rather than diverge.  This is exactly where the non-bank groups with one BDO team have a clear advantage over banks as these inefficiencies rarely come up.  The non-bank groups are simply just flatter organizations and more nimble by design.

The banks have the advantage when market, sourcing channel and product delineation merit two groups as the goal is to cover the market, not cannibalize it.  It also demonstrates lasting commitment when banks invest in having factoring and ABL groups within their specialty finance business as many banks come and go in this space.  This translates into true maximum market-reach yield at every level of the risk spectrum from factoring-to-ABL-to-traditional C&I.  It should be noted that when done correctly the companies, sourcing channels and underlying facility sizes are truly at opposite ends of the lower middle-market spectrum. On the flipside, several banks are still working through product market fit as part of clearly differentiating these groups.  When the starting point is the same size of business and similar facility size it becomes challenging to create clear market messaging. Conversely, the non-banks strategically and opportunistically thrive in this dilemma. One of the reasons is that today there are many ABL credits that five years ago would have been factoring clients. 

There is an element of psychology to borrowers wanting ABL over factoring as well as industry dynamics that have driven a change in credit risk.  For many reasons, the non-banks focused on sub-$10 million ABL facilities’ need to provide that product flexibility for both the client and to ensure they continue to scale.  They also need to do it as the market for non-bank lending at higher rates is not nearly as big as the bank-rate market.  The competition is fierce from larger groups coming down and smaller groups going up. This applies to both bank and non-bank competition.  So, a hyper-competitive market forced the non-banks to create a more efficient business model from non-banks playing in the sub-$10 million facility.

Easier said than done, but utilizing one well-trained BDO team to solve for the credit by having both products is a growing trend.  This has been evidenced by several noteworthy M&A transactions including North Mill’s acquisition of Summit and Republic’s merger with Continental. Both of these deals created national reach and full product breadth for both firms. The list goes on, but these are groups that are national in scale, focused in terms of market approach and each use one team to sell both products.  The trend of lower middle-market ABLs selling both ABL and factoring is here to stay and is effective in terms of competing against many of the bank-owned groups.

There is a twilight zone of narrow facility sizes where banks face a real competitive weakness in terms of selling if their ABL and factoring groups source from the same channels and diverge on similar credits. The hand-off or communication within separate groups inside banks is not always as seamless as executives would like and certainly not always timely.  The non-banks have a clear selling advantage here and use it to their advantage.  The banks still have clear pricing advantage, but do struggle with deal sharing among groups.  The lack of synergies can frustrate senior bank executives who do not always delineate the many differences in products such as a collect-out vs. a work-out. That said, expect to seem some changes in the market as certain bank-owned groups find footing within a narrower range vs. others who are right to keep the groups separate.  Right now though, the market seems to conclude that banks with clear facility size, product and sourcing delineation do need two different groups.

We should all expect this topic to start getting more and more attention as the non-banks continue to scale and take advantage of the cross-over credits that could go either way inside a bank specialty group.  It will be interesting to find out whether two is in fact better than one. The non-banks might beg to differ!