Hello Inflation!

Due to a series of converging events, significant inflation in developed economies has reared its ugly head for the first time in 50 years. Earlier this month, the United States Bureau of Labor Statistics released data that confirmed the worst fears of many, prices in the United States climbed the most in three decades in a single month in October 2021. Also, there is even worse news for United States households and policy makers - inflation is likely to rise further soon before it peaks.

Let’s first focus our attention on the facts: inflation increased at an annual rate of 6.2% in October 2021 and significant price increases were recorded in nearly every key sector of the economy. What is perhaps the most concerning trend in the data is that price in the table below that utilizes Bureau of Labor Statistics’ data, prices jumped in not just gasoline and cars but now food and other commodities that we all consume daily.

So why should a factoring company care about higher rates of inflation? The answer is for many reasons; this could be a watershed moment for how we operate our firms as we grapple with inflation. A quick review of key points made in my June 2021 article presents some of the issues we need plan for as we enter 2022.

1.?????If you receive financing from outside sources (whether that is a bank, group of private investors, private equity, etc.) have you thought about locking in your cost of financing to protect yourself much higher borrowing costs in the future?

a.?????If you cannot lock in long-term financing for your factoring firm, purchase a financial product (or derivative) to hedge against a significant increase in the cost of interest you would be potentially exposed to soon.

2.?????If you are in the market to acquire property or equipment, now is the time to act before rampant inflation kicks in and prices for these assets increase in line with the overall rate of inflation.

3.?????Suggest that your clients research pre-purchasing raw materials and inventory before prices increase and, as a result, erode profits. If you are convinced that prices are headed up, now is the time to buy.

4.?????Mentor your clients and pose this question to them: do you have excess equipment, inventory, or property that they simply no longer have a need for??

5.?????Work with your client to lock in long-term suppliers now at today’s prices to prevent margin erosion when prices increase significantly soon.?

6.?????If you rent your office space, think about purchasing office space for your factoring business for a couple of compelling reasons:

a.?????Due to the pandemic, many businesses are selling real estate that is no longer needed due to the explosion of remote work from their staff.

b.?????Purchasing real estate could provide an opportunity to buy “excess space” by larger corporate entities. The ability to be a cash buyer might put you in the driver’s seat.

c.?????Keep in mind that if you decide to purchase a hybrid remote work strategy for your firm, it does not make sense to purchase space.

Assume you do not need office space, you could be in for a shock when it comes time to renew your office lease. If hyperinflation does occur, landlords will likely take full advantage of this fact and may increase the cost of your space. Of course, if you do purchase real estate, do so with long-term, fixed-rate funding.?

7.?????Now is the time for a comprehensive analysis of the costs you incur in your factoring operation and that the pricing for your professional services are value and margin driven not by what the market will bear.?

8.?????Compare what you are paid to provide capital to industry data to ensure that you are adequately compensated for the working capital you provide to your clients.

9.?????Consider the structure of your services. Are you still offering to provide SMEs working capital and other services on a fixed-fee basis? In an environment of nominal inflation and decreasing interest rates, this approach might make economic sense.

10.?Price your services on a variable rate structure that is tied to a market index or publicly published financing index like the Prime Rate. Our firm uses a Prime Plus pricing structure on relationships above a dollar threshold of monthly invoice volume. We also add a minimum floor rate to protect from a significant drop in market interest rates.

11.?Consider outsourcing parts of your factoring operations. The secret to success is to regularly consider ways to keep overhead low without reducing the level of services.?

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In conclusion, I hope these tactics help your factoring enterprise and your clients to prepare for an increase in the overall rate of inflation in the United States. Smart businesses don’t panic; they plan ahead, and we should also follow suit.?