Last year was a study in contrasts as many business sectors recovered from the pandemic recession only to face a new challenge: rising inflation. The financing market was no exception.

In its annual indicator of industry activity, the Secured Finance Network (SFNet) found cause for optimism but warned members to expect continued economic pressures in 2022.

The 2021 Annual Asset-Based Lending & Factoring Survey cited a year of rapid economic growth and increased demand for financing. Portfolios were strong, with SFNet reporting a significant decline in gross write-offs relative to volume and average earning assets.

The survey found that total credit commitments for all participating lenders grew by 8.3% from 2020 to 2021, from more than $260 billion to $281.93 billion. Bank and non-bank commitments increased at similar rates.

The two lender groups had contrasting results for new client commitments (increasing for banks, decreasing for non-banks) and commitment runoff (decreasing for banks, increasing for non-banks). For all lenders, deals with existing clients increased, with average expansions/extensions up by 82.9% for banks and 63.9% for non-banks. Overall, commitment trends reflect a competitive lending environment, with lenders trying to retain and, as possible, expand existing clients.

The current year, however, may bring a mixed bag of opportunity and risk.

“Looking ahead, 2022 could present challenges for lenders, who, along with clients, will need to navigate rising inflation, supply chain disruptions and workforce shortages,” Richard Gumbrecht, CEO of SFNet, said. “These factors, in addition to geopolitical uncertainty, could undermine economic growth and favorable business conditions. Fortunately, should we enter a period of contraction, both ABL and factoring have fared well in such environments as companies seek additional sources of working capital.”

The survey found increases in total outstandings were 18.8% for banks and 33.6% for non-banks. That outpaced the growth in commitments, leading to higher credit line utilization for lenders.

Growth in purchased participations reflected existing deals getting bigger for banks, according to SFNet, and increased outstanding runoff matched increased commitment runoff for non-banks.

“Wholesale outstandings grew the most, potentially reflecting inventory accumulation in response to supply chain challenges and surging consumer demand,” the association said.

Also of note: The location of U.S. bank outstandings shifted from the Northeast to the Midwest and West.

In a trend that suggests pricing compression, the survey found total revenues decreased relative to outstandings. Total expenses also declined, including for personnel.

A highlight of the most recent survey was strong portfolio performance, with non-accruals, gross write-offs and loan loss provisions decreasing for banks and non-banks.

Profits, meanwhile, declined relative to outstandings. But SFNet reported that the average return on assets increased for both groups while the average return on equity increased for banks.

The survey found a regional trend in asset-based lending as bank offices shifted away from the Northeast in 2021 and a general shift in economic activity toward the Sun Belt.

The increased demand last year for financing included factoring, according to SFNet. Factoring volume increased by 18.7%, showing greater acceptance of factoring as a financing mechanism.

“Factoring clients increased significantly, nearly doubling,” the association said. “Overall client growth might be expected given the growth in volume; however, such pronounced growth may also reflect factors gaining clients through acquisitions as opposed to developing entirely new clients. Regional client shifts to the Southeast parallel volume trends; and, in terms of industry concentration, fewer electronics and furniture clients could stem from supply chain disruptions, whereas growth in textiles and apparel coincides with surging demand for durable goods.”

The 2021 survey found overall revenues increased relative to volume and average earning assets, but interest revenue dropped. Meanwhile, service fee revenue increased. That may reflect increased extensions or other accommodations that generate fees, according to SFNet.

And while overall expenses dropped, those for personnel increased.

“Notably, personnel expenses for business development dropped, a trend that parallels a decline in the total number of business development employees,” SFNet said.

Portfolios, meanwhile, had solid credit performance in 2021 compared to past years. And profits increased amid rising revenues and falling expenses.

“Overall, 2021 was a strong year for the factoring industry, but there are challenges on the horizon,” SFNet said. “Rising inflation could stymie real economic growth and continue to exert upward pressure on wages, an important component of expenses. In addition to spurring wage growth, labor shortages could also challenge factors as they hire new staff and expand to meet demand.”

Still, lender sentiment in the most recent Confidence Index was encouraging as bank and non-bank lenders assessed various business aspects and the broader ABL market. Overall, their confidence has endured.

Banks had positive expectations for demand for new business and client utilization. And while the overall business conditions component decreased substantially, they expressed optimism around business conditions and portfolio performance. Bank lenders remain moderately optimistic in hiring expectations.

As for non-bank lenders, they reported the most positive expectations for client utilization, demand for new business and hiring. They were slightly optimistic regarding portfolio performance and moderate in expectations for business conditions.