Our Top Five Commercial Finance Trends for 2023
We're well into 2023 and see trends that began at the end of 2022 and have continued into the new year. We believe these trends will dominate the remainder of the year.
1. Rising interest rates. Last year was remarkably volatile as 2022 sported the fastest US Fed rate hike cycle in history. Lenders that hadn’t already built variable pricing into their client or borrower contracts had a more than challenging time – higher cost of funds, thinning margins, increased labor expenses, etc. Lenders who have worked proactively to support and maintain interest margins will benefit as reference rates (Fed Funds and SOFR) are expected to continue increasing - landing somewhere between 5% and 6%.
2. Tightening bank credit. With rising interest rates and a continued darkening economic forecast, more banks are tightening commercial credit standards. As a result, small to mid-sized businesses are finding it increasingly difficult to obtain working capital. Further, we see growing pipelines in the specialty finance space, from factors to asset-based lenders. More businesses are forced to find alternatives to traditional bank lines of credit.
With the growth in opportunity, new factors and asset-based lenders have entered the specialty finance space. Established lenders are seeking more funding through larger bank lines, increased subordinated debt and capital support, or equity. For companies like Haversine Funding, this growth has created more opportunities for our firm – more opportunities to help lenders build their portfolios for the future.
3. More acquisitions/consolidation in specialty finance. We expect this trend to continue and also anticipate that some lenders will test the waters on sell-side valuations, potentially seeking acquiring partners to accommodate growth needs or reduce costs (or provide an exit before potential portfolio concerns arise in a down market).
4. Increased efficiencies in outsourcing and technology. As costs have gone up, more lenders are looking for ways to reduce their expenses, capture and understand their data, and create more efficiencies. Lenders have increasingly turned to automation technology to tackle some of the biggest complexities of a growing business. For some functions, lenders are supplementing automation with outsourcing. From fighting the labor shortage through embedding outsourced partners into non-core, entry-level tasks within their firms, to automating various processes, to garnering data to identify red flags or “watch” credits – more lenders are using technology, and this trend is not going away.
5. More customer experience focus. Lenders, just like other businesses, are continually examining processes and increasing spending to improve the customer experience. In the specialty finance space, we’re seeing an increase in new hires for internal positions (meaning cross-functional and collaborative teams using the same staff to do open position roles). Internal cross-training and collaboration helps maintain key personnel and expands their skill set as they become multi-players within the company, allowing businesses to rely on outsourcing and technology for more process-driven tasks. The implementation and utilization of technology geared towards improving the customer experience can be used to onboard prospects sooner, get faster funding through multiple funding vehicle options to clients, communicate more information directly to clients, and additional client-facing tasks. Enhancing the customer experience for some may also mean offering more advisory services or providing hyper-personalization through digital marketing.
Beyond the five above are other trends we expect to see, such as ensuring back office operations, underwriting, and other systems and processes within a lending platform are solid and ready for what will be new workout and liquidation challenges this year. We’ll save that for another day.
For today, these five made our list.