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Supply Chain Financing, Factoring and ABLs Expected to Grow in 2019

In a new study by the Commercial Finance Association Education Foundation, survey participants in the $4 trillion secured lending network said they expect the industry to experience strong growth fueled by economic expansion and abundant liquidity.

The study was conducted with assistance from Ernst and Young, LLP, and the final report provides insights to various secured finance options, such as asset-based lending, factoring, supply chain finance, and asset-backed securitization, to name a few. Commercial users of the finance options include those in retail, wholesale, textiles and apparel and transportation.

There are some caveats to the expected growth in 2019, and that’s due to headwinds from trade policy uncertainty, aggressive deal terms and growing talent shortages, the study found.

Collectively, providers of secured financing employ more than 60,000 people and the industry deploys capital to over 1 million U.S. businesses. The volume of U.S. secured financing for commercial firms in 2018 was over $4 trillion, impacting a projected one-fifth of the gross domestic product in the U.S., whether directly or indirectly, according to the study. Further, the study found that non-traditional market players are adding to the overall market size by serving under-represented segments in the small and middle markets.

As for findings in specific sectors, in the area of supply chain finance, the study estimated the total market at roughly $416 billion in 2018. That’s a 9 percent gain over the volume in 2017. The supply chain finance market includes purchase order finance, supplier finance and inventory finance. This particular segment of secured lending helps support U.S. imports and exports, and it represents an “amount equal to 12 percent of total U.S. trade receivables” last year, according to the report.

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In factoring, about 900 U.S. factors had agreements where the volume in 2018 was $101 billion. The expectation was that the factoring business could grow in the low single-digit range in 2019, driven mostly by strength in micro, small and medium enterprises. Additional growth could come from expansion into nontraditional industry segments.

The volume of asset-based lending, or ABL, was around $465 billion in the U.S. in 2018, representing a 6 percent rise over 2017’s financing commitments. Growth for 2019 is estimated to increase between 6 and 7 percent. The report said losses on ABL loans have been less than five basis points in each of the past three years. However, there are concerns on the horizon noted by the respondent, which include the return of covenant-lite structures and diminishing credit protections.

For equipment finance and leasing, U.S. private enterprises and public institutions acquired nearly $1.76 trillion in equipment and software last year, or about 8.5 percent of GDP. The report found that roughly 60 percent of that purchase volume, or $1.04 trillion, was bought through financing from leases, loans or lines of credit.

Other forms of secured lending include leveraged loans, cash flow loans and asset-back securitization. In leverage lending, the total outstanding principal from this form of financing was $4.3 trillion at the end of 2018. However, institutional loan volume of $726 billion in 2018 was down from $919 billion in 2017. Cash flow loans rose 26 percent last year for the investment-grade lending arena, hitting a total of $1.035 trillion for 2018. And the ABS sector grew 9.3 percent for total outstanding commercial finance-related asset-backed securities. Reaching $305 billion at the end of 2018, the sturdy said the volume represented 40 percent of outstanding ABS, but not including collateralized loan obligations.

“This landmark study confirms that secured financing is critical to the day-to-day operations of U.S. businesses of all sizes and demonstrates the interrelationships of these asset classes based on borrower’s needs and economic cycles,” Richard D. Gumbrecht, chief executive officer of the Commercial Finance Association, said. The CEO noted that many of the non-syndicated asset-based lending options are what’s funding the “lifeline to many small and medium-sized businesses and their employees.”