8 February 2019
WOA member, Mark Mandula, shares his views on the influence of Brexit on the Factoring Industry in this updated piece (he wrote the first one in 2016 when Brexit was voted).
I wrote a short article back in June, 2016 that tried to address and speculate on the impact that Brexit could have on the global Factoring Industry. I noted in the open paragraph the following, “It is very difficult at this early stage to accurately quantify the impact of the vote last week by British voters to quit the European Union. Predictions have ranged the entire gamut; for every pundit predicting that the loss of one of the EU’s biggest members will deeply wound the rest of Europe there is another suggesting that the Brexit vote and resulting crisis will over the long term make result in little or no harm to Europe. I am not really sure that anyone has a focused crystal ball about the future relative to the Brexit vote at this juncture.”
Now nearly 3 years later, much water has come under the Brexit Bridge and the almost unbelievable series of twists and turns that have occurred caused me to go back and review my original thoughts on Brexit.
I was reluctant then and still am now to try to predict the future about the impacts of Brexit, given the very fluid economic environments in the UK, the EU and the United States even before the vote. I would prefer as I did in 2016 to focus more on what I believe we as an industry need to be thinking about as we look forward in 2019 and beyond.
Many of my original concerns and thoughts about what could be the direct impacts on the factoring industry of the Brexit vote remain unchanged. I have outlined these with some updates below;
1. Now in 2019, as was the case is 2016, we need to be very careful and insure that our Factoring businesses are prepared for a much darker economic environment in the near future. There are an increasing number of articles backed up with credible data that the current economic cycle [in both the United States, EU and other global economies] is “mature”. Additional data coming out of China also confirms that the significant growth we have witnessed over the past 10+ years there is slowing down.
As an illustration, consider just some of the headlines in a single recent daily edition of the Wall Street Journal this week alone:
“Some Lending Standards Tighten”
“CEO’s Less Optimistic About Near Term Future Economic Prospects”
“Shutdown Shock May Endure for Federal Workers”
"Consumer Sentiment Drops Significantly in January 2019”
2. These increasingly pessimistic viewpoints are actually rooted in data and fact, not political rhetoric or bias. The Great Recession of 2009 when the entire global economy retracted occurred a long 10 years ago. We tend to forget this especially when one considers that the longest expansion cycle in the United States since 1980 was only 11 years in duration. [Federal Reserve data]. The shortest was 7 years. So odds are that the current global expansion is probably living on borrowed time and another recession or worse will be visiting us before the end of decade.
So as I suggested back in 2016, I think it still is an excellent idea to step back and do some serious internal “tire kicking” to see if we are ready for a coming economic storm. How? I suggest again that every factoring firm critically and comprehensively look at the key functional areas of their practice including the following;
- Sales and Marketing; Are the clients we are adding survivors or just taking up space? Are we adding clients that will prosper, tread water, sink or fail in a period of economic retraction? Is the initial client screening that we are doing accurately assessing risk? Are we exposing ourselves to significant credit or debtor risk? Are the processes we use to look at Principal integrity [like comprehensive background and credit checks if possible] sufficient? Do we monitor and refresh our data on a never ending basis?
- Underwriting; Are we doing enough Due Diligence and evaluation on a prospective clients’ business model? History of performance in a downturn? Worst case scenario financial modeling? Management capacity to manage during a crisis?
- Facility Approval; Are the Public Search Researches that we are doing accurate? Timely? Enough? Including Tax reporting, suits and Judgment track record in recessionary environments?
- Closing and funding; Do we have complete and properly executed Documents? Will current funding and verification procedures work when things turn south? Are the steps taken internally to verify collateral diversified and effective? Are we using a menu of techniques including debtor communication online portals, backup documentation review and other techniques?
- Account Monitoring & Risk Management; Do we visit every client before funding to insure that verification processes set during Underwriting are understood? Followed? Are our collection procedures effective, efficient, enough? Do our Account Executives monitor client performance enough? Do we compare actual client behavior and performance with Management oversight versus projected results?
- Control and Protection; Is our cash dominion process secure and sufficient? Are Reserve and Advance adjustments constantly carefully monitored and approved?
- Credit Oversight; Are we really prepared for a “worst case scenario AKA Brexit? Is the review we do on our debtors, client portfolios and performance comprehensive and consistent? Are exceptions reviewed and approved? Are any deviations from Standard Operating Procedures reviewed and approved by Senior Management before they happen? Are we taking full advantage of credit enhancement tools, like credit insurance and other tools to limit Debtor exposure?
These are just some of the functional areas to think about as part an internal Due Diligence process. The list could probably be pages longer but I think this is good start.
In conclusion, I think that even without the shockwaves from the Brexit vote in 2016 and the resulting ongoing twists and turns that seem to change daily, we need to prepare all of our Factoring businesses for stormy weather on the horizon. If we do, we will be in a better position to continue to professionally and profitably serve key constituents including our clients, partners, employees and the communities where we work and live. The more we focus on diversifying our Factoring portfolios geographically and industry sector wise now, the better we will be in a position to perform if and when less favorable economic conditions arrive. Focusing on strengthening our credit quality now will allow us record a consistent track record of earnings, Asset growth, employee and client retention. When we achieve all of these value drivers, the end results are the highest possible levels of client retention, duration, satisfaction levels and long term profitable relationships.
As the old saying goes, “Chance favors the prepared.” The more we prepare now, the higher the chance that our individual firms and our Industry will not just survive but thrive when less favorable economic conditions arrive in the future.