The data in this Annual Factoring Industry Survey presents results from a period that now seems like a distant memory. Sitting down to write commentary was very challenging. Commenting on the past year seemed moot; and attempting to correlate or speculate on the future of our industry seems a fools’ errand.

One thing to keep in mind is that receivables factoring is a an “all-seasons competitor” in the world of finance.  Factoring is a product that has been around for hundreds, if not thousands, of years, and so I am confident that it, like our economy, will weather the current stormy global conditions stemming from the pandemic. In fact, it is more likely that the industry will grow and thrive during this time of stress and uncertainty. The very design and nature of accounts receivable factoring is ideally suited for providing liquidity to businesses in times of financial, operational stress and uneven cash flow.

So with the preface “everything is different now,” I will offer some commentary in the hopes that it, along with this survey, will provide some comparative analysis of where we’ve been, and at least a glimpse into what we might be able to expect going forward.

In 2019 the overall economy, as measured by Gross Domestic Product, grew 2.9% with very strong Q1 growth of just over 3%, followed by three quarters of just over 2%, indicating some deceleration of growth over the year. Some of this change can be attributed to the cumulating impact of the tariff/trade wars, which resulted in shifts of supply chains and some drag overall activity.

Additionally, the economic expansion in the United States became the longest in history at 120 months in January of 2020. Within the overall expansion, a more detailed look at some sectors reveals that a “rolling recession” has been weaving a path, though at times little noticed.

For instance, the retail sector has had a couple waves of recession, as over-building and ecommerce reduced the amount of brick and mortar purchases. Energy markets (Oil & Gas) has had periods of significantly depressed prices, due to slack demand as alternative sources have grown in popularity and global producers vied for market share. The auto industry experienced some significant softness as overall vehicle sales flattened and the shift to electric vehicles accelerated. For companies and lenders heavily exposed in these sectors, conditions have been very challenging.

This “rolling recession” was masked in aggregate GDP statistics because of the dominance of consumer spending. GDP in the US is 70% consumer spending. So, if consumers are feeling good and have access to credit, spending remains strong and GDP growth continues.

Lastly, financial markets in 2019 were as client friendly as most of us can ever recall. Despite some rate increases through the year, nominal interest rates remain at historically low levels. Combine this with an over-abundant supply of capital in all levels of the capital stack and the result was a brutally competitive environment. We saw large national and global pools of capital enter the fray; chasing the relatively higher levels of yield, spurred on by benign credit losses for an extended period. This played out either through the formation of new “credit funds” or the acquisition of historic participants, which then embarked on aggressive growth campaigns. These elements led to some of the most challenging competitive dynamics the industry has experienced.

Reviewing the SFNet Annual Factoring Industry Survey, I noted the respondent pool was somewhat small and dominated by larger participants with approximately half being banks or bank affiliates. Still,the data gives us an overall picture of conditions worth reviewing.

Overall, we observed only comparatively minor changes within the factoring sector as a whole, and amongst the data points are some opposing shifts. This may suggest that the changes noted were related in part to the sample, as much as related to changes in the market. Regardless it is difficult to draw any dramatic conclusions from the data collected.

• Total factoring volume fell 8% in 2019 from 2018, with reductions in both domestic (7.7%) and international (13.2%). We can attribute the overall decline to competitive conditions and generally favorable economic conditions. The disproportionate reduction in international factoring is most likely tied to changes in trade flows, related to the “tariff/trade” war that came into view in 2019. The shift in volume parallels an overall decline in the number of factoring clients (5.4%) year over year; though while the volume of international factoring fell, the number of reported clients increased slightly.
• Within the United States we observed a shift of factoring volume away from the West, Southwest and Midwest, with significant increases in the Northeast and Southeast. Looking at the regions by number of clients shows no meaningful changes in the West, Midwest and Southwest, but a 5.5% drop reported for the Northeast and a 6% increase in the Southeast. It may be possible to attribute some of this to shifts in underlying regional economic activity, but the correlations would be tenuous at best.
• There was a more dramatic shift in the mix of recourse vs. non-recourse factoring as we saw a 6.3% increase in the number of non-recourse clients and a 9% increase in the  volume of non-recourse factoring. This most likely reflects more competitive conditions enabling the shifting of risk to the factor.
• The mix of notification vs. non-notification factoring reveals a greater percentage of clients utilizing notification factoring in 2019, 92.8% versus 89.9% in 2018. However, transactional volume showed the opposite with 70% of overall volume in 2019 being notification versus, 71.5% in in 2018.
• A look at the industries served shows a generally more diverse group. Declines were observed in every traditional industry. The declines in these sectors were offset by a significant increase in the “Other” category. This may point to a greater acceptance of factoring across a broader range of industries.
• Reported figures on revenue as percentage of volume reveals a slight increase, indicating stable and perhaps slightly increased yields. The mix of revenue showed some changes with a decline in interest income offset by increased service fee and other income. This may point to factors being more cognizant of how they “package” their deals.
• Looking at expenses and efficiency, overall expenses remained flat, but a detailed look reveals a lower level of business development and other direct expenses as percentage of assets. Offsetting these lower expense levels was an increase to other personal. This most likely is indicating a shift in how the reporting businesses are staffing their operations.
• A look at reported losses shows significant year over year increases gross write-offs as a % of assets increased 102 basis points, with recoveries down slightly in the 2018 -2019 period. A look at this same data over a 15-year horizon, suggests that after very many years of very benign losses, there may have been a shift to less stringent underwriting and controls in 2019.
• Lastly, the noted increase in losses reported for 2019 led to a corresponding decrease in pre-tax income both as a % of volume and assets.

Summing up the factoring industry saw only minor changes in the 2018 – 2019 time period, except for a significant increase in credit losses, most likely attributable to the competitive environment. Long-term benign credit conditions and very liquid capital markets, combined  with a slowdown in economic, set the stage for an increase in losses and decreased profitability.