Is Your Factoring Company Ready for the Next Wave of Clients?

The Unexpected Slowdown

Many factoring companies are experiencing an unusual slowdown that occurred so fast and unexpected that it has caused a jolt in the factoring industry. It has left historical purchase declines along with uncertain payment commitments from account debtors. Some are still waiting to see if account debtors will re-open with high hopes of getting a positive payment status.

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What Is The Status Of The Invoice Factoring Industry?

The financial state of alternative lenders that include mostly asset-based lenders, factoring companies and cash advance companies are either in three categories right now.

1. Funding on Hold! – Not originating new business until they are able to recoup losses and re-establish their credit lines. Equity from the lenders are required by the bank line on every deal and most of that is gone if account debtors are not paying or have gone past recourse days. Banks impose a leverage requirement for every dollar that is employed to clients. This leverage requirement is going to determine if the lender has to unload clients to regain cash on hand used for leverage or shut down if they are not able.
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2. Disruption in Staff – With the sudden drop of 30% to 60% revenues, many companies are not able to maintain the staff it once had. Working with a skeleton crew is doable, but eventually customer service, limited number of verifications and onboarding new clients will negatively affect the survival of the finance company.
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3. Business as Usual – For lenders that were fortunate to be funding essential businesses are actually doing well with very limited disruption. Account debtor credit is still a major concern for many receivable based finance companies but fortunately there are still many financially strong credit account debtors to finance. Credit Insurance Companies not surprisingly just like every time there is credit crisis, they reduce coverage and run for the hills.

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Portfolio Diversification, Cash Leverage Requirements, Non-Payments and Credit Insurance

From what I can determine in talking with other factors in the industry and having our own experience with our factoring clients, the factors that had receivables representing diverse industries and nationwide spread of accounts realized the least drop in purchases and losses. The steeper declines and account debtor defaults are being reported from companies financing receivables in the oil service, retail department stores, automotive supply chain, transportation, travel, hotel related and leisure industries that were all devastated. Some of these sectors were already weak and the Covid-19 finished them off or they dug a deeper hole. For example, Hertz Rental Car just filed bankruptcy over the weekend but already had issues going in to the new year.

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In my opinion, by late June or early July of 2020 will be a monumental point for the financial industry that marks approximately over 120 days since the global shutdown began. This is a vital period where many banks, asset-based lenders and factoring companies will have to decide what to do with the non-performing or bankrupt account debtors. Some account debtors have either not re-opened or are asking for deferred payments from creditors.

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Although a payment status sounds like good news coming from a payables clerk working from her home that doesn’t have a clue when they will go back to work, it doesn’t help the leverage obligations that most factoring companies and lenders need to have for continuous funding. For factoring companies that have credit insurance, notifications of claims have to start going out before the 90 to 120-day period expires on the non-paid invoices. I assume the month of May and June will result in a very high-volume processing of insurance claims.

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Preparing for the New Wave of Clients Needing Accounts Receivable Factoring

"I believe factoring companies will be caught in the middle of a perfect storm for new business opportunities."

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An ideal prospect is a business that outpaces its cash flow cycle by selling on credit term sales, and cause overdue payables obligations. It’s that simple!"

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The current economic condition has caused businesses that were perfectly positioned with cash on hand are now running on fumes. The next phase that happens is businesses will try to extend payables to suppliers but that will be a short term solution.

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As the economy rises from the shutdown impact there will be orders to fulfill and no cash flow to maintain payroll, taxes and stay current with suppliers. Banks will not be an option as before, asset-based lending is not a viable option either since there is very little receivable assets. For the first time cash advance companies will very limited on loan offers since businesses have been low idle for 4 to 5 months.

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The factoring industry will be the best option and will be right there to provide cash flow for every invoice sold on credit terms as we rebuild our economy.

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Author

Raul Esqueda, President

1st Commercial Credit, LLC