As we delve into the intricate realm of factoring after a few years of disruption, we're met with a myriad of challenges and opportunities that shape the industry's landscape. In this insightful discussion, we are joined by prominent voices in the factoring domain: Neely Campbell-Thomas, Ivan Baker, Kevin Laborde and Phil Cohen. Together, they provide distinct viewpoints regarding the forces shaping the factoring industry in 2024 and shed light on the strategies being employed to navigate through uncertain economic climates and technological advancements.

How do you foresee the overall economic climate impacting the factoring industry in 2024, and what strategies are factoring companies adopting to navigate potential challenges?

Neely: We are in a challenging transportation market with significant headwinds, particularly for small to mid-sized carriers. At the same time, federal interest rates are at a 23-year high. To combat these headwinds, many freight factoring providers are focusing on driving operational efficiencies and risk mitigation strategies while continuing to provide quality customer service to their clients.

Ivan: Macroeconomic variables have shifted significantly over the past twelve months. The regional bank crisis, higher interest rates and asset quality issues have caused a shift in the commercial credit markets. Banks are more conservative as it relates to underwriting new transactions and are having less patience with covenant violations, historical losses, and other variables impacting the strength of the borrower. As we move in 2024, I expect this trend to continue which will result in an increase in the quantity and the quality of the opportunities that we evaluate.

Kevin: CFR continued to see decent levels of activity with its clients in 2023. As a result we do not anticipate much difference as we roll into 2024. Rising rates sometimes convince companies to curtail their activities, but that only goes so far in their decision making. At the lower end of the market where we play, we try to get clients to pay closer attention to their margins. Managing margins has always been an issue for small businesses so we don't really see that changing much.

Phil: We believe the worst of the economic downturn occurred in 2023. Regardless of who you are in the factoring industry, 2023 was an extremely challenging year. Withstanding degradation of debtor credit, softness of demand and rising interest rates was a “perfect storm” for factors across all areas of focus. Prudent factors have and continue to tighten their credit box, becoming more proactive at the first sign of trouble. While it appears that the Federal Reserve Board may have engineered the soft landing we all desired, we believe the first half of 2024 will look a lot like 2023 before we see any meaningful positive change. For Factor Finders, the beginning of 2024 will consist of a long climb out of a deep hole.

With the evolving technology landscape, how do you anticipate advancements in financial technology influencing the operations and services offered by factoring companies in the coming year?

Neely: I anticipate many factoring companies will continue to adopt data-driven machine learning and artificial intelligence to create more operational efficiency and risk mitigation measures. Additionally, factoring providers are continually updating their client-facing technology to provide the most seamless client experience.

Ivan: The industry has taken a diverse position as it relates to technology. Many entities are looking to automate all processes while others use technology but are more old school in their approach to doing business. I can appreciate the variety of approaches but when looking long term, Factors & lenders that integrate into their clients accounting software via various API’s will be well positioned as these interfaces continue to increase the efficiency of factoring/ABL processes. This integration will also assist in the accuracy of monitoring as well as fraud mitigation.

Kevin: Like most factors we try to be open to new technologies and advancements. Being a smaller operator, there are fewer opportunities to streamline much of what we do, but AI does present some interesting opportunities in several facets of our business, especially underwriting. For now our team members know what they need to do and as long as they execute we are not likely to significantly modify our operating model unless we can effectively implement some of the new ideas coming out. AI aside, we do tend to require access to these newer debtor portals coming online to better keep track of invoices etc., so taking advantage of those is important.

Phil: The obvious recent technological advancement is AI or Artificial Intelligence. That said, while we expect that more progressive factoring companies will begin exploring Artificial Intelligence tools to streamline their back office while monitoring client/debtor anomalies, full implementation of these tools is likely years away. The cost and scale required to implement these technologies appears to be daunting in the near future. In the short term, using AI for marketing purposes is well within the reach of factoring companies of all sizes; particularly those with an active on-line presence. Utilized as a tool to assist in various forms of content development rather than as a replacement for human input, AI can dramatically assist with both the quality and quantity of marketing materials. Be warned, when using AI for marketing and content purposes, you need to be extremely aware of how the search engines are responding to it as well as policy and best practices with respect to disclosures.

Are there any regulatory changes or industry trends on the horizon that factoring professionals should be aware of in 2024, and how might these impact the day-to-day operations of factoring companies?

Neely: In recent years, we have seen a significant uptick in state laws, regulations, and mandatory disclosures which directly affect factoring companies. On the federal side, the Corporate Transparency Act imposes new disclosures to FinCEN. It can be challenging to stay up-to-date and comply with the ever-changing patchwork of laws. I encourage all factoring providers to become active members of the American Factoring Association so they can stay well informed of new laws and regulations so their voice can be heard during the legislative process.

Ivan: As far as industry trends are concerned, we continue to see consolidation. As overall spreads have decreased, the marginal cost of capital is critical in being competitive in the marketplace. The borrowing power of the larger institutional entities has made it more difficult for smaller non-bank borrowers to compete and that has provided acquisition opportunities. I expect this trend to continue in 2024.

Secondly, as Bankruptcy filings increase at a substantial rate (from a year over year perspective), organizations tend to be more focused on Account Debtor risk. Operationally there is a tendency to monitor credit risk in a more conservative manner and potentially use credit insurance more frequently. The ability to frequently update debtor credit decisions will be important in managing risk in this dynamic economic environment

Kevin: Disclosure requirements continue to be an issue though not so much for CFR in the market where we operate. That could change though so we keep an eye out for any of those developments.

Phil: Every factor must be focused upon the evolving state regulations that are changing our industry from largely unregulated to a virtual checkerboard of regulation. While some larger factors with greater financial and legal capacity may have the ability to monitor and comply with regulatory requirements, most cannot. As more and more states follow California, Utah and New York implementing a variety of requirements on factors management must 1) stay aware of legal developments, 2) develop a strategy to comply or 3) make the difficult decision to stop new business activity in some states. I highly recommend that all factoring companies join and support the American Factoring Association as the best resource for monitoring, compliance and to influence potential future regulation.

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Contributors:

Neely Campbell-Thomas, Director, Love’s Financial Services

Ivan Baker, CEO, United Capital Funding

Kevin Laborde, President, Cash Flow Resources, L.L.C.

Phil Cohen, President, Factor Finders; President, PRN Funding

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