Vertical IQ and Lendovative Technologies have now released the AR and Inventory Reliance Score Reports for the third quarter of 2024. These reports indicate the likelihood that a given industry sector, through its reliance on either accounts receivable or inventory, will seek financing from their financial institution or a non-bank funding source during the next six months.
From the beginning of 2021 through the present day, approximately 3.5 million new businesses have formed in the United States. With that rapid rate of expansion, it is critical for commercial lenders to study the data and determine which industries are most likely to need their services.
The Bureau of Economic Analysis (BEA) reported GDP expansion in the United States of 1.4% in the first quarter of 2024, followed by 2.8% in the second quarter.* While signs are currently pointing to a slower third quarter, businesses seeking revolving lines will benefit from lower interest rates beginning with the anticipated Fed reduction in September. The financial institutions and non-bank lenders that serve the working capital needs of these businesses will benefit from knowing where the candidates are for both accounts receivable and inventory financing.
How are the scores calculated?
Think of each score as a stress test. First, we study both accounts receivable and inventory as a percentage of a company’s total assets. Then we weigh that percentage against the growth rate being experienced in the industry. By merging these two numbers, we can estimate the short-term stresses on a specific industry.
For example, accounts receivable for the average employment services business now represent 43% of total assets, and the average growth rate in that industry is 6.9%. When that much of your business is tied up in accounts receivable, it does not take a very high rate of growth to require short-term working capital financing. That is why the sector is so popular among asset-based lenders and factoring companies.
Much the same is true with inventory concentrations. Consider auto parts distributors, where inventory comprises nearly 52% of total assets and the average growth rate is 4%. As that growth accelerates, or declines, it will likely impact the need for inventory financing in the sector.
Vertical IQ and Lendovative will continue to produce these reports each quarter during 2024 to monitor the trends. In the meantime, we wish you and your organization a successful third quarter. Thanks once again to RMA for providing the source data for this initiative.
If you would like to know more about the full scope of Vertical IQ and Lendovative Technology services, reach out to either organization at info@verticalIQ.com or info@lendovative.com. Vertical IQ is a nationally recognized leader in industry intelligence. They deliver actionable, convenient, focused, and easy-to-digest industry insights to help you better understand prospects’ or clients’ business challenges. Lendovative Technologies provides collateral management and document archiving solutions for financial institutions. It is a core mission of both organizations to promote SMB activities in the United States.
*Source: BEA Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA)