According to the Secured Finance Network’s 2020 Annual Factoring Survey, between 2019 and 2020, the factoring industry experienced unprecedented declines in volume (as did most secured financing) and the highest level of write-offs in 15 years, yet it still remained profitable, demonstrating the durability of the business model and its suitability as a financing tool for uncertain and turbulent times.
Factoring is the process by which a buyer — a non-bank lender or bank affiliate referred to as a “factor” — purchases the accounts receivable of a client at a discount. Clients are typically companies involved in textiles, apparel, business services, shipping, transportation and other industries that want to improve cash flow, according to SFNet.
According to the survey, the factoring industry did not grow in 2020. In fact, it shrank. However, it did provide a source of financing to businesses adversely impacted by the COVID-19 pandemic.
“A year ago, at the outbreak of the pandemic, I noted that receivables factoring is an ‘all seasons competitor’ in the world of finance,” Terry Keating, president of Accord Financial’s U.S. asset-based finance unit, a factor and a member of SFNet’s advocacy committee, said. “It has been around for hundreds, if not thousands, of years, and I am pleased at how well it has weathered the challenges of 2020. In fact, the stress and uncertainty the pandemic brought to 2020 may have provided an ideal opportunity for it to demonstrate its strengths.”
For 2020, overall factoring volume in the U.S. declined 25.9% following the sharp reduction in broad economic activity related to the COVID-19 pandemic as well as the impact of broad government stimulus programs. While overall domestic factoring volumes were down significantly, international factoring showed significantly increased activity, with a 61.8% rise in volume. Factoring volume related to the acquisition of personal protection equipment (PPE), much of which was sourced internationally, increased in 2020, offsetting some of the general decrease observed domestically.
The regional volume data showed some sharp differences between regions in the U.S. The percentage of overall factoring volume in the Midwest experienced the biggest change, with a decline from 11.1% of overall volume in 2019 to 7.8% in 2020. There was a smaller decrease in the Southeast region. While it cannot be pinpointed, the slowdown in automobile manufacturing output in the related supply chain early in the pandemic could account for this change, as these industries are concentrated in the Midwest and Southwest.
Reviewing client industries by volume showed textile companies remained the top users of factoring. However, there was a significant shift in overall percentage volume upward from business services and a very significant decrease in factoring attributed to the electronics industry. Again, the pandemic’s impact on global trade flows combined with a micro-processing chip shortage (which became more pronounced throughout 2020) likely contributed to this significant shift in the electronics sector.
A slight increase in recourse factoring occurred in 2020, while the number of clients using recourse factoring as a percentage overall fell several percentage points, possibly attributable to a combination of some recourse clients converting to asset-based lending facilities in a very competitive marketplace combined with the disparate effects of government stimulus programs on overall liquidity needs.
Overall, 2020 demonstrated the overall resilience of the factoring industry as it weathered the most significant economic and health crisis experienced since the Great Depression and the 1918 Spanish Flu pandemic. The factoring industry and its members came through 2020 scarred but comparatively unscathed, according to the survey.
