A wave of change may be headed for the factoring industry, with some large, well-publicized transactions and smaller ones that don’t get headlines but are part of a possible consolidation trend.
“I anticipate over the next 24 to 36 months there will be an emergence of a handful of very large factoring nonbank lenders,” Marius Silvasan, the CEO of eCapital, said on a recent edition of the Drilling Deep podcast. “They will never be as large as banks but will be handling billions of dollars.”
Given the acquisitions that eCapital has made, “Obviously we are transitioning ourselves to be one of those players,” Silvasan said.
ECapital provided more than $4 billion in capital in 2020 through its factoring business and anticipates doing $5 billion this year, Silvasan said. By contrast, Triumph Business Capital, one of the biggest factoring providers in the U.S., purchased about $2.5 billion in invoices in just the first quarter. The company said that came on the acquisition of about 1.19 million invoices from more than 8,000 clients.
In a similar vein, Geoff Brenner, the CEO of Triumph Business Capital, said on the recent earnings call of his Triumph Bancorp (NASDAQ: TBK) parent that the factoring industry “remains highly fragmented.” But he added that it is not likely to stay that way.
“You do have a few large players that occupy a third of the market and then it drops off relatively swiftly to hundreds of other smaller players,” Brenner said on the call, according to a transcript supplied by SeekingAlpha. “I think there will be some consolidation in that.”
Speak to anybody about factoring and it generally isn’t long before several terms pop up: “Mom and pop shop.” “Fragmented.” “Hundreds.” All of them are used to describe the nature of the network of lenders seeking to buy invoices and pay the fleets off quickly at a discounted price.
In the case of eCapital, Silvasan said his company had made eight acquisitions of lenders in the past few years, seven of them in the factoring sector. One of them was eCapital, and it became the name of Silvasan’s company.
While there is no definitive list of who is the largest factoring business, since the vast majority of them are privately held and data is not available, Silvasan said he believed his company is now in the top 10 of factoring lenders.
The benchmarks for measuring the size of a factoring company, Silvasan said, are the size of the book of business and the number of invoices being purchased monthly or annually.
“You need a lot more technology to do it right,” Silvasan said. ECapital has an in-house technology team, has used third-party applications where necessary “and the key to us is to have technology that is client-centric and provides a variety of tools to enable the ability to have fleets get their funds and get funded quickly,” he said.
Silvasan said getting paid in the past by a factoring company could take “days to a week.” Funding now can take place in hours, he added, in part because of that technology investment.
Silvasan made his comments in the interview with Drilling Deep just a few days before Triumph Bancorp made its announcement that it was acquiring HubTran, an open loop payment system that numerous factoring companies use. It will continue to be open to all comers, Triumph executives have said, and won’t just be a processing tool used by Triumph Business Capital, which is the factoring arm of Triumph Bancorp.
The acquisition doesn’t open new services to factoring companies; they could use HubTran previously. And the merger of HubTran and TriumphPay — Triumph’s quick-pay arm, which has been the focus of growth at the parent company — does not create a new factoring company; that combined entity will process, not lend. That fact is one of the reasons why Triumph CEO Aaron Graft said on the company’s conference call with analysts last week, on several occasions, that Triumph Business Capital — which would be a direct competitor with eCapital — will not receive preferential treatment within the TriumphPay/HubTran combination and would not have any access to data about the transactions of any other factoring company.
Factoring on its surface looks like an unbeatable business. Triumph, which has probably the most transparent data on factoring returns given that it is a publicly traded company focused on that type of lending, reported that the yield on the average receivable balance in the first quarter was 13.85%, slightly improved from the fourth quarter of last year. But a year ago it was 16.13%.
Triumph has played its part in the consolidation of the industry by its midyear acquisition of the factoring operations of Covenant Logistics. However, that purchase, described as a “mess” by Graft, has lingering problems, though they do appear to be nearing resolution. On the company’s earnings call, Graft said bringing HubTran into the Triumph business would keep the company away from the merger and acquisition game for the foreseeable future.
Silvasan said with such a fragmented market, the key to success for those who make it through any sort of consolidation wave, or who become the consolidators themselves, will be technology and service. The rates that factoring companies charge fleets for their services are never going to vary so much that competing on price becomes possible.
Pricing in factoring is done at a discount to the size of the invoice. A discount rate of 7% is generally said to be the industry norm, though it does fluctuate; that is how the average rate of return quoted by Triumph for its factoring business can vary. That discount rate, depending on the rate of repayment, can then be translated into the rate of return that shows up in the Triumph data publicly, and privately for companies like eCapital.
If larger banks were to return to factoring, Silvasan said it would be unwinding the decision by larger institutions at the end of the fiscal crisis to get out of the business. That created the ability of “mom and pop” lending companies to step into the breach, he said, but trends are now shifting.
“The industry is going through a consolidation, and some of the factoring businesses are going to become much larger,” Silvasan said.
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