Overall healthy factoring demand, while less than anticipated due to weaker spending in key client sectors, suggests that the factoring industry is agile, resilient and open to new business, according to the Secured Finance Network (SFNet).
SFNet’s Mid-Year Factoring Survey reports that combined factoring sentiment rose to 68.8 in H1/24, up from 64.8 at the end of 2023.
Although factors’ expectations for portfolio performance and U.S. business conditions were basically flat, they were improved for employee headcount (+12.5, to 62.5) and new business demand (+6.4, to 79.2). The prevailing industry mood comes against the backdrop of the bulk of economic indicators pointing to a “soft landing” for the economy. Specifically, despite declines in job growth and new orders and a contraction in manufacturing, inflation is falling close to pre-pandemic levels. While the Federal Reserve’s preferred inflation standard was up by a 1.8% annualized rate over the last three months, the Fed recently cut interest rates by 50 basis points, unemployment fell while core retail sales rose in August and unemployment benefits have been subdued all year.
Total Volume and Client Numbers Decline
Overall factoring volume dropped 1.9% among respondents reporting volumes in both H1/23 and H1/24. As was true for respondents in the second halves of 2022 and 2023, the falloff was greater for international (8.7%) than for U.S. (1.6%) volume. Volume shares per industry remained the same from H2/23 to H1/24, with apparel/textiles at the top, accounting for roughly half of all volume (50.3%) and another third split among the automative, business services/staffing, transportation/trucking and electronics industries.
Factoring client totals also were down, by 7.7%, from H1/23 to H1/24, as there were 11.1% fewer U.S. clients but 13.1% more international clients. Even though banks and brokers remain the top referral sources, at almost 45% combined, their share of referrals fell during the past year.
Regional distributions of factoring volume and clients were mostly unchanged throughout last year, but volume and client distribution differed significantly: the Northeast had the highest volume share in H1/24 (56%), while the Southeast had the highest clients share (26%).
“Non-recourse factoring continued to comprise the bulk of total volume (85.8%) but full recourse factoring still comprises the majority of clients (78.6%),” the report said. “Non-notification factoring accounted for 56% of all volume in H1 2024, with its share of volume increasing steadily since H2 2022. Notification factoring’s share of clients has held steady in recent years, hovering around 96%.”
Other Key Data
- Total funds in use grew by 5.0% among respondents reporting in H2/23 and H1/24, even though 75% of them reported a decline in their funds in use during that period. This suggests a wide variance in demand from factor to factor, despite most factors experiencing a decline. At the same time, average earning assets were off by 0.8%.
- Average return on assets increased to 5.30%, while average return on equity decreased to 6.21%.
- Where portfolio performance is concerned, write-offs as a share of volume were 0.10% in H1/24, while provisions and allowances for loan loss as a share of volume grew to 0.37%. Factors observe that portfolio performance metrics are stable and healthy by historical standards.
- Factoring revenues fell by 6.4% from H2/23 to H1/24, while direct expenses were down by 3.1% over the same period. Since the revenue shrinkage was more than the expenses falloff, the pre-tax income share of volume slid from 0.42 in H1/23 to 0.30% in H1/24.
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The number of factoring employees decreased by 5.3% from H2/23 to H1/24. That period saw account management and business development headcounts become smaller but the underwriting headcount got bigger.
