Lendovative Technologies and Vertical IQ have released the AR and Inventory Reliance Score Reports for the fourth 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.
The SBA Office of Advocacy now estimates that there are 34.7 million businesses in the U.S. with 500 or fewer employees. This number has increased from just over 31 million in 2019. With that rapid rate of small business 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) recently adjusted GDP expansion in the United States to 1.6% in the first quarter of 2024, followed by 3.0% in the second quarter. The Federal Reserve also has begun a strategy of monetary easing, reducing interest during the second half of the year. Businesses seeking revolving lines will benefit from these lower rates. Additionally, 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 AR and Inventory Reliance 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 7.2%. 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 51.7% of total assets, and the average growth rate is 3.1%. As that growth accelerates, or declines, it will likely impact the need for inventory financing in the sector.
Vertical IQ and Lendovative have produced AR and Inventory Reliance Score Reports each quarter during 2024 to monitor industry trends. In the meantime, we wish you and your organization much success as we close out the year and prepare for 2025. Thanks also to RMA for providing the source data for this initiative.
If you would like to know more about the full scope of services offered by Vertical IQ and Lendovative Technology, 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: Gross Domestic Product | U.S. Bureau of Economic Analysis (BEA)