While lenders experienced subdued demand for factoring in 2023, reflecting soft consumer retail spending and a cautious retailer approach to inventory management, the Secured Finance Network (SFNet) Year-End Factoring Survey found that overall factoring sentiment improved somewhat last year, up 6.0, to 64.8, where 50 indicates a neutral outlook. The report attributed improved sentiment to the U.S. economy’s strong position at year’s end and a persistently solid labor market, which continued into the second quarter of 2024.

“Factoring continues to be strong and resilient, successfully adapting to market conditions, and playing an essential role in fueling our economy,” said SFNet CEO Rich Gumbrecht.

Challenges facing the retail and trucking industries put a small dent in factoring portfolio performance in 2023, but some factors believe demand will increase after the first half of 2024. The industry is also more bullish about two of the four sentiment indices – business conditions (up 13.6, to 63.6) and portfolio performance (up 12.7, to 72.7) – in the Factoring Confidence Index. The other indices, for new business demand and employee headcount, showed little and no movement, respectively.

Despite ongoing job gains in 2024, averaging 276,000 through March, “there are signs that consumers are starting to feel pinched,” the report stated. “Indeed, a low savings rate and rising credit card delinquency rates raise questions about how long consumers can continue to fuel the economy. Meanwhile, inflation is still a risk to watch as it hovers about the Fed’s 2% target and service-sector inflation remains particularly sticky.”

Factoring volumes, client totals show decreases

Overall factoring volume slipped by 2.6% among respondents who reported volume for both H2 2022 and H2 2023. While U.S. volume was off 1.6%, international volume dropped much more heavily, by 28.2%. The significant drop in international factor volume is attributed to a drop in the number of clients in this market. As expected, apparel’s share of factoring volume increased to 49.4% in H2 2023 from 29.1% in H1 2023.  The increase is largely due to the seasonal nature of apparel businesses being heavily weighted to the second half of the year. Four other industries – transportation/trucking, services/staffing, automotive and electronics – together comprise about a third of all volume.

Meanwhile, “the number of factoring clients declined by 5.2% from H2 2022 to H2 2023,” the report said, “with U.S. clients dropping by 4.6% and international clients decreasing by 8.6% over the same period. Comparing the relative small decline in U.S. factoring volume to the reported U.S. client base, we can assume that the decline in U.S. client was centered in smaller service based clients exiting the market. Banks and brokers remain the top two sources of client referrals, accounting for over half of all referrals during those periods.”

There was little change in the regional distributions of factoring volume and clients throughout last year, but there was a big gap between volume and client distribution, as the Northeast had the highest volume share, by far, in H2 2023 (57%), but the Southeast had the highest clients share (26%).

“Non-recourse factoring continued to comprise the vast majority of total volume (85.6%) while full recourse factoring comprised the majority of clients (78.8%),” noted the report. Typically, factors offer full recourse factoring to smaller volume clients in the transportation and services industries, accounting for the high concentration of clients in this category. “Non-notification factoring comprised over half of all volume in H2 2023 (55%) overtaking notification factoring, with its share of volume increasing steadily from H2 2021 (23.0%). Notification factoring still comprised the vast majority of clients (96.3%) and its share of clients was relatively unchanged across all reported periods.”

Additional Factoring Survey Highlights

• Total funds in use fell by 10.8% for respondents reporting in H1 and H2 2023, with 70% of them reporting a mid-year over mid-year decline. From H1 to H2, 85.7% of factors saw their average earning assets (AEA) decline. The decline in AEA is attributed to a decline in consumer spending, as retailers and clients sought to rebalance and reduce inventory levels.
• Average return on assets went up last year, from 2.21% to 4.35%, while average return on equity went down, to 13.26%.
• Average loan turnover fell from 47.8 to 45.5 days in the second half of 2023, when average days sales outstanding also decreased from 50.7 to 44.6.
• Factoring revenues were down by 4.4% from H1 to H2 2023, while net interest revenue – which still accounts for most revenue – rose to 60.8% during that time. As one would expect, with a decline in volume, the share of revenue going to service fees fell slightly.
• The number of factoring employees decreased marginally, by 1.2%, between the first and second halves of 2023. Account management, business development and underwriting all reported lower headcounts.

Follow the link for more publicly available information on the Year-End Factoring Industry Survey. SFNet members have access to additional data and detailed reporting.