Economic Backdrop: Inflation Up, Labor Down, Tariffs Bite

While headline U.S. GDP grew by 3.3% in Q2 2025, much of the increase was artificial—driven by a sharp drop in imports (which adds to GDP calculations) following a tariff-fueled inventory rush in Q1. A more accurate gauge of economic strength, final sales to private domestic purchasers, showed just 1.9% growth. Labor market momentum also slowed: after averaging over 120,000 new jobs monthly in early 2025, the last four months added only 107,000, with most gains in healthcare and social services.

Meanwhile, core PCE inflation ticked up to 2.9% in July, its third straight monthly increase, and headline CPI hit 2.9% Y/Y in August. With tariff costs filtering through supply chains, consumers face rising prices—especially in core goods. The Federal Reserve responded with a 25-basis-point rate cut in mid-September, citing a weakening labor market as the more urgent risk. Still, elevated inflation may slow the pace of further cuts.

This complex macroeconomic environment has made working capital management more critical than ever for mid-sized and smaller businesses. With higher input costs and declining consumer sentiment, many borrowers are turning to factoring as a bridge through uncertainty. The effect of tariffs has been particularly notable in logistics-heavy sectors such as apparel and consumer goods, where margin compression is driving stronger demand for receivables finance.

Furthermore, the Federal Reserve’s policy shift has created a confusing credit backdrop. While the September rate cut was intended to support labor markets, its muted effect on long-term rates has preserved elevated borrowing costs. As banks continue to retrench from riskier credits, factors have stepped into the void—offering liquidity with more speed and flexibility than traditional lenders.

Funds in Use, Clients, and Earnings All Rise

Despite the economic turbulence, factoring activity surged. Among long-term respondents:

- Total funds in use rose 13.0% from H2 2024 to H1 2025.
- Average earning assets climbed 6.0% over the same period.
- Factoring volume grew 3.5% Y/Y, with U.S. volume up 3.0% and international up 16.0%.
- Client counts rose 17.0%, including 14.5% growth in U.S. clients and 29.0% internationally.

This growth reflects both demand-side pressures—borrowers facing stricter underwriting from banks—and supply-side agility from factors.

Much of this expansion has been fueled by a steady flow of new business across a broader range of industries and geographies. Respondents reported that deal sizes have modestly increased, with larger ticket transactions more frequently exceeding $2 million in funds in use. Additionally, new client onboarding times have shortened, as firms invest in digital underwriting and faster verification systems.

International factoring, long a smaller slice of the U.S.-based market, has seen increased interest due to global supply chain realignments and re-shoring strategies that are driving cross-border invoice flows. The 16% rise in international volume is a clear indicator that U.S. firms are capturing a greater share of trade finance demand in North America and parts of Asia.

Sentiment: Slight Dip, But Still Strong

The Factoring Confidence Index remained positive at 67.0, despite a modest downtick (-3.4 points) from H2 2024. The decline stemmed from tempered expectations for general business conditions (down 13.6 points to 50.0), as 64% of respondents expect conditions to stay the same in the near term.

Other sentiment components remained healthy:

- Demand for new business held firm at 81.8.
- Portfolio performance dipped slightly (-4.5 to 72.7) but stayed solidly positive.
- Hiring expectations rose (+4.5 to 63.6), with many firms planning headcount expansion in H2.

Despite a slight pullback in the overall confidence index, sentiment remains positive across most business development and risk indicators. In fact, 73% of survey respondents reported stable or increasing pipeline activity heading into Q3. The slight decline in the general business outlook likely reflects macroeconomic concerns rather than a weakening of core factoring fundamentals.

It’s worth noting that many firms expect the second half of 2025 to present more opportunity than threat. The combination of sticky inflation, cautious bank underwriting, and elevated corporate inventories all point to a more prominent role for receivables-based lending, particularly as larger companies seek more responsive financing partners.

Regional Shifts: Northeast Declines, Others Rise

While the Northeast still accounted for 51% of U.S. factoring volume, its share declined by 7.1 percentage points from H2 2024, suggesting a rebalancing of activity across regions. Other regions gained modest share, including the Southeast and Midwest. For clients, the Southeast remained dominant at 28%, with overall client distribution relatively stable.

One of the more notable developments was the redistribution of factoring activity away from traditional strongholds like New York and New Jersey. While the Northeast remains a dominant player, shifts in regional industrial bases—especially logistics, food processing, and nearshored manufacturing—have helped drive factoring growth in the Southeast, Southwest, and parts of the Midwest.

The Southeast’s rise is tied in part to the explosive growth of warehousing, freight forwarding, and last-mile delivery infrastructure, while the Midwest is seeing a resurgence in industrial and durable goods clients looking to factor receivables amid uncertain demand forecasts.

Industry Mix: Apparel Dominates, But Transportation and Retail Surge

Client industry composition was largely stable, with apparel/textiles still leading at 48% of volume. However, the most significant half-over-half growth came from:

- Transportation/Trucking: +1.73 percentage points
- Consumer Retail: +1.65 percentage points

These gains suggest that demand for receivables-based working capital is rising in sectors highly sensitive to supply chains and consumer demand volatility.

The increased share of transportation clients corresponds with broader economic changes: higher fuel costs, congestion at ports, and a rebound in trucking capacity have all stressed logistics players' cash cycles. Factoring firms have become a vital liquidity partner in these scenarios, helping carriers bridge invoice delays without sacrificing fleet investment or payroll needs.

Similarly, the rise in consumer retail clients reflects the sector’s uneven recovery post-COVID. Retailers facing fluctuating foot traffic and erratic e-commerce conversion rates have found factoring to be a responsive solution to manage vendor payables and inventory replenishment.

Structural Trends: Recourse, Notification, and Insurance Shifts

Factoring structure trends in H1 2025 highlight changing borrower preferences and risk profiles:

- Non-recourse factoring comprised 80.4% of volume, down slightly (-3.1 pp), while full recourse made up 19.6%.
- Full recourse accounted for 70.9% of clients, down 7.3 pp, with non-recourse client share rising to 29.1%.
- Notification factoring dominated both by volume (55.4%) and clients (97.4%).

Advance rates declined sharply, falling 172.5 basis points to 82.6%, while average days sales outstanding (DSO) ticked up 1.7 days to 47.6.

These structural shifts point to a bifurcation in the client base. Larger companies—more likely to carry their own credit insurance or require tailored solutions—are skewing toward non-recourse models. Smaller clients, especially those without sophisticated credit departments, remain primarily on recourse terms. However, notification-based factoring continues to dominate due to its operational transparency and ease of implementation for lenders.

The drop in advance rates—nearly 175 basis points—signals both heightened risk sensitivity and a broader reassessment of asset quality as clients face longer payment cycles and higher default probabilities.

Insurance Usage and Risk Management

Most factors (55%) continued to partially insure portfolios, but the share of firms not using credit insurance rose to 27%, up from H2 2024. This may be due to more borrowers carrying their own credit insurance policies—particularly among larger clients—reducing the need for factor-led portfolio insurance.

The shift away from credit insurance by some factors may also be a cost optimization move. With premiums rising and policy exclusions becoming more stringent, some firms have adopted hybrid approaches—using internal credit scoring models to selectively insure only higher-risk clients. Others have developed deeper partnerships with brokers to structure more bespoke policies for key accounts.

Meanwhile, insurers themselves are tightening capacity in industries exposed to geopolitical risk or commodity volatility. Factors are responding by improving their portfolio-level analytics and contingency planning.

Revenue Grows Faster Than Expenses

In good news for margins, total revenue increased 35.1% Y/Y, while direct expenses rose just 5.7%. Though some of this gain may reflect seasonal patterns, the margin expansion underscores the scalability of factoring operations as volumes increase.

Portfolio performance improved: write-offs as a share of volume fell by 7 basis points, marking a return to pre-pandemic norms.

This margin expansion underscores a fundamental strength of the factoring model: scalability. With relatively fixed operational costs and increasing digitization of client onboarding and monitoring, firms are seeing top-line growth translate directly into earnings. The write-off reduction also reflects tighter portfolio oversight and a shift toward clients with more diversified debtor bases.

Respondents also noted an increase in cross-selling of ancillary services—such as cash flow forecasting tools and inventory finance—further enhancing client stickiness and fee income.

Outlook: Healthy Pipeline, Prudent Optimism

As 2025 heads into its final quarter, the factoring industry is well-positioned to benefit from persistent market volatility, global supply chain shifts, and evolving borrower needs. With rising borrower demand, sound portfolio metrics, and new opportunities created by banking constraints and tariffs, factors are stepping confidently into the void.

With international client counts up nearly 30%, regional U.S. shifts underway, and new industries leaning into receivables finance, the second half of the year could further expand factoring’s market share within secured lending.

Respondents remain bullish, but cautious. The sharp rise in interest from companies affected by tariffs—particularly in electronics, automotive, and intermediate goods—suggests that factoring will remain a critical backstop in the credit ecosystem throughout 2025.

Looking ahead, the combination of rising inventories, lower advance rates, and a broader shift toward data-driven underwriting may reshape the factoring landscape. But with strong demand, improving margins, and institutional capital increasingly interested in purchasing receivables, the outlook remains compelling.

Chatgpt was utilized in the creation of this article.