Navigating the Shifting Tides in Factoring: Trends to Watch in 2024

The recent International Factoring Association (IFA) 30th Annual Conference had an electric energy, fueled by record attendance and lively discussions. Still, beneath the buzz, conversations revealed a nuanced reality: the factoring and asset-based lending (ABL) industry is navigating a landscape marked by both challenges and change, with opportunities for growth and innovation.  

A Mixed Bag with Potential

Deal flow remains healthy, but not without complexities. While many lenders are experiencing robust activity, most are also encountering longer closing times. The drivers behind this shift to delayed deal closings include increased required due diligence and approval times in response to economic uncertainty combined with clients and borrowers carefully weighing their options in an increasingly crowded market. We see a spectrum of deals, from straightforward transactions to those demanding intricate structuring due to high leverage or declining collateral values, out-of-formula components to close new deals, and other considerations.  

Agility and a deep understanding of evolving risk factors are paramount for success in today’s market. Strong factoring and ABL teams and companies are quickly identifying opportunities, figuring out how to structure through challenges, and becoming more efficient in their screening and oversight. Being able to make a “yes/no” decision more quickly is a paramount skill for managing the increasing flow of deals.

Banks: A Catalyst for Change

Banks are still active lenders, but their cautious approach and tighter restrictions create a unique opportunity for alternative lenders. We're seeing an uptick in banks seeking to move underperforming or complex loans off their books. While these deals may present challenges, they also offer significant potential for those who can successfully navigate refinancing and restructuring.

Amidst the bank retrenchment, there are refinancing opportunities for factors and asset-based lenders. However, these opportunities require meticulous due diligence and innovative structuring to ensure sustainable solutions. In some instances, these refinancing opportunities come with insufficient collateral coverage and other factors to consider when taking on a new client or borrower.  Recognizing these challenges, more factors and ABL players are joining forces with banks, maintaining segments of some deals, paying out over a period, or collaborating with other third-party alternative lenders to help bridge these structural gaps, fostering a sense of unity and shared purpose in the industry.  

Delinquencies: A Call for Vigilance

Discussions of rising delinquencies are a reminder that proactive risk management is more critical than ever. The current economic climate and past aggressive lending practices are putting increasing pressure on borrowers. A bump in delinquencies is a warning for lenders to enhance monitoring, implement tighter controls, and foster open communication with clients to mitigate risks and ensure sustainable growth.

M&A: Expectations and Key Elements

The M&A market for finance companies will be more active this year, with consistent whispers of potential deals. However, a disconnect between buyer and seller expectations on pricing is slowing progress towards deal consummation. Prior transactions with high valuations have set a precedent that may not align with current market realities. Patience, realistic expectations, and persistent negotiation will be critical to successful deal-making.  

This uncertainty in acquisitions highlights the importance of key elements to maximize valuations. Aspects such as succession planning, experienced and tenured management and origination teams, policies, procedures and dual controls, niche products or technologies, scalability, solid financial and operational track records with key metrics over time, low concentrations and credit losses, and interest and fee diversification are all important considerations for a firm seeking a successful exit.  

Competition & Specialization: New Entrants, Expanding Players, and Finding Your Niche

New lenders continue to enter the market, backed by larger private credit groups, while existing players expand their reach and product offerings, intensifying competition. This has led to downward pressure on pricing for larger deal-size opportunities and a greater need for differentiation. Factors and asset-based lenders who specialize in niche industries or leverage technology for efficiency will be well-positioned to stand out.

The New Regulatory Maze

There have been lots of discussions on regulatory issues at every conference we’ve attended, not just the IFA Annual Conference but also at the most recent Secured Finance Network’s (SFNet) annual independent roundtable. The regulatory environment is becoming more complex, especially within the factoring space, with varying state-level disclosure requirements. Staying ahead of these changes and ensuring compliance has become necessary to avoid operational disruptions and potential penalties.  

Factors are working with their peers, attorneys, and industry associations, like the IFA and SFNet, to navigate these new challenges and documentation requirements. What has become abundantly clear this year is that these new rules are not going away, and the resulting risks/operational challenges cannot be ignored. It’s been top of mind and a topic of conversation for all in the specialty finance space.  

Embracing the Future: AI and Automation

Artificial intelligence (AI) and automation present both opportunities and challenges for the industry. While AI-powered solutions can streamline processes and enhance risk assessment, striking a balance between technology and human expertise will be key.  

Many groups have started using AI for basic marketing and other daily efficiencies. Some groups are working to automate various processes using AI. New vendors are popping up to serve the space, but overall, it’s too new and too early to see how all these efforts will shake out.  

It’s clear those that are actively engaging with AI and automation will have an edge in the future for factoring and ABL. For those that have avoided working with AI or automation tools, feedback within the conferences has been to start immediately or risk falling further behind the competition.  

Haversine: Your Partner in Progress

At Haversine Funding, we understand the complexities of this ever-changing landscape. Our experienced team, combined with our commitment to innovative solutions and a focus on partnership, allows us to navigate these challenges alongside our lending clients. We're dedicated to providing the resources and expertise needed to thrive in this dynamic environment.

Let's connect and discuss how we can help your factoring or lending platform succeed this year.