Government to investigate ‘abuses’ of the Invoice Finance process between providers and insolvency practices

  • Anil Kanda
  • 14 Sep, 2012

Comment: “Ashley fully support the moves towards regulation. Our approach has always been to avoid building strategic alliances with insolvency firms. Our policy of “being the friend of the smaller business through good times and bad” is dominant and would conflict with the activity that is currently being criticised.”

Treasury leads inquiry into invoice ’abuses’

The Government is investigating “abuses” of the administration process by invoice finance providers, following an investigation by The Telegraph.

Invoice finance is a form of asset based lending which sees cash advanced to small and medium-sized businesses against their sales ledgers.

10:00PM BST 08 Sep 2012

The Government is investigating “abuses” of the administration process by invoice finance providers.

The Treasury and the Insolvency Service have begun the inquiry into the unregulated industry following an investigation by The Telegraph that revealed that lenders are exploiting company failures at the expense of the taxpayer, business owners and other unsecured creditors.
Entrepreneurs, industry insiders and a campaign group told this newspaper that some invoice finance firms are abusing contractual fees and their combined creditor status to force firms into administration.
They then collect the outstanding debts, charge the business so-called “termination” and “collection” fees, and in some cases even fund a new “phoenix” business to repeat the process.
A spokesperson for the Business Department said: “The Government is aware of the concerns that have been raised and is currently looking into them in more detail. BIS, the Treasury and the Insolvency Service are all engaged, and we are in contact with relevant industry bodies.”

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Brian Moore, of the Campaign for Regulation of Asset- Based Finance, said: “We’re ecstatic that the Government is looking into the obscene abuse that has been going on, where the banks have gorged themselves at the expense of HM Revenue & Customs and thrown thousands of people out of work in the process.”

Conservative MP Nick Boles, a key ally of David Cameron and the new planning minister announced in last week’s Government reshuffle, has outlined his concerns over the alleged abuses to the Treasury and HM Revenue & Customs.

The former business owner will now be invited to take part in the investigation.
Frances Coulson, former president of insolvency trade body R3, warned that “an enormous amount of abuse at the murkier end of the industry” is leaving the taxpayer out of pocket by “hundreds of millions” of pounds.

The high street banks and independent providers which make up the industry justify their controversial fees as the costs of collecting the outstanding secure debt in a failed company. However, fees can be around 20pc of the entire sales ledger value rather than the outstanding balance.

There is also concern over the links between insolvency practitioners and the industry. Brokers who pass leads to lenders are often owned by insolvency practitioners. Since the invoice finance provider, as secured creditor, can then choose which administrator to appoint and when, this can create a conflict of interest.

“We [the insolvency firm] give you a client, you bust them, you get the termination fees and we get the administration,” was how the boss of one invoice finance lender described the “worst cases”.
The growing industry’s advances to companies stood at £15.7bn at the end of 2011.
Mr Moore believes the removal of the Crown’s preferred creditor status in 2002 – designed to aid business rescue – created the problem.

Ian Johnston, an independent invoice finance provider, has also warned that administrations can be “highly lucrative” for lenders.
“Most industry insiders… agree that regulation is long overdue and necessary to cut down on the excesses.”
The Government said it is examining the “extent of the problem, if any, and what might be done to resolve it”.

Invoice finance firms ’profit’ from company failures
Invoice finance providers are “profiting” from putting clients into administration at the expense of the taxpayer and other creditors, according to allegations made by business owners, industry insiders and a campaign body.

Asset-based lending — which allows companies to advance cash against their sales ledger, for example — is growing while conventional bank debt continues to contract.

Brian Moore, who leads a group calling for the regulation of asset-based lending, said he is preparing a submission to the Parliamentary Commission on Banking Standards which, he claimed, revealed the “unacceptable behaviour” of some invoice finance providers and brokers.
The group argues that the so-called “termination” and “collection” fees that invoice finance providers can charge when a company goes into administration, combined with their preferred creditor status, are being abused by some providers and are allowing “lenders to profit from a business going to the wall”.

Mr Moore said that in some cases “viable” companies have been unnecessarily forced into administration, costing jobs and leaving HM Revenue & Customs and other unsecured creditors out of pocket while invoice finance providers profit.
The group, renamed this week as the Campaign for Regulation of Asset Based Finance, alleges that this creates instances where there is a “revolving door” of administrations of the same company.

The unregulated industry, which is made up of banks and independent providers, justifies collection fees as the administration costs of collecting the outstanding secure debt in a failed company. However, the fee can be around 20pc of the entire ledger value rather than the outstanding balance, and such fees have been applied even when there is no outstanding balance.

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Asset-based lending — which allows companies to advance cash against their sales ledger, for example — is growing while conventional bank debt continues to contract. Total advances provided by the industry grew by 7pc last year.

Banks are increasingly trying to turn customers away from unsecured overdrafts and towards asset-based lending, which is more profitable for the lender, and, crucially, provides them with security over the debtor book. Ian Johnston, an independent invoice finance broker at Factoring Solutions, is not part of Mr Moore’s campaign but said there was an “unhealthy relationship between certain [invoice finance] companies and the insolvency profession”.

“Putting a client into administration can be highly lucrative for the [provider] involved. The boss of one [invoice finance] company recently told me that one quarter of their profits come from termination fees,” Mr Johnston said.

He added that the “industry is badly in need of regulation as currently the [lenders] wield far too much power and on the occasions when they abuse that power the client has no one to complain to. Most industry insiders are aware that not everything in the industry is rosy and privately they agree that regulation is long overdue and necessary to cut down on?… the excesses.”

The former owner of a failed manufacturing business contacted The Daily Telegraph to complain that his firm had been unnecessarily put into administration, costing more than 100 jobs and HMRC around £100,000, with a hefty termination fee blocking funders that had been willing to save the business.

He alleged that despite only being given two-and-a-half working days’ notice, a funder was found to plug a cashflow shortfall and replace the lender. This was rejected because they would only pay half of the lender’s termination fee of around £100,000.

A subsequent offer, which included the full termination fee, was also turned down. The provider then made £300,000 from the termination and collection fees, he alleged.
An accountant, who asked not to be named, said the majority of providers were reputable — and invoice finance was often the best form of capital for growing companies — but added that he was “sure there are people in the industry that put businesses into administration because they can make money out of it”.

He added that some invoice finance firms have internal league tables for relationship managers ranking how many additional fees they charge when a company gets in trouble or misses a deadline, for filing management accounts, for example.

“These are fees they’re legally entitled to charge but the business will expect to have a relationship with the provider — league tables just suggest someone is being squeezed.”
Kate Sharp, chief executive of the Asset Based Finance Association, said: “Our members invest significant time and resources into customers [and] have no wish to put [them] into insolvency. The longer the relationship, the more rewarding it is for the member.

“Unfortunately, despite the best efforts of all involved, sometimes businesses fail. Where that happens our members would seek, within the bounds of the contract signed by the client, to protect their commercial interests as best they can in that unfortunate situation.”

Invoice finance firms’ “abuses costing taxpayer millions”
Abuses of the administration process by invoice finance firms are costing the taxpayer “hundreds of millions of pounds”, the former president of the insolvency profession’s trade body has warned.

Invoice finance is a form of asset based lending which sees cash advanced to small and medium-sized businesses against their sales ledgers.

Frances Coulson, former president of R3, said there is an “enormous amount of abuse going on at the murkier end of the [invoice finance] market” as invoice finance providers, sometimes in collusion with insolvency practitioners, profit from putting companies into administration.
Banks and independent providers are exploiting contractual fees and their preferred creditor status to make money from struggling businesses, she said.

Ms Coulson’s warning follows an investigation by The Daily Telegraph which revealed that some lenders benefit from corporate failures at the expense of the taxpayer and other creditors.
She said the law firm where she works as a senior partner, Moon Beever, had worked on a number of these cases, which had “cost the taxpayer hundreds of thousands of pounds – and we’re only a small practice”. The issue had “been picked up in recent Government insolvency consultations but ignored”, she said.
Invoice finance is a form of asset based lending which sees cash advanced to small and medium-sized businesses against their sales ledgers.

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So-called “termination” and “collection” fees are charged by providers when a company goes to the wall.

The fees are designed to cover the risk of a client leaving before the end of their contract, and the administration costs of collecting outstanding debt in a failed company. However, fees can be about 20pc of the entire ledger value rather than the outstanding balance, and such fees have even been applied when there is no outstanding balance.

Scores of business owners and industry insiders have contacted this newspaper this week to warn of unethical practices linked to the fees in the unregulated industry.

An invoice finance broker said: “Certain larger independent [lenders] have created havoc among their clients. They are trigger happy to appoint administrators so that they can gorge themselves on surpluses in customer sales ledgers using aggressive … clauses.”

He claimed that owners of affected companies are sometimes threatened with bankruptcy proceedings if they try to hold up the process and he had seen directors “become suicidal” as a result.

Ms Coulson added: “It is not uncommon to see a lender fund a [failing company] which has already ceased trading so it can nab the termination fee, often [as much as] £500,000, as well as fund the [new business]. Usually it is the taxpayer that is left behind.”

She added that bad practices would be challenged if creditors appointed an independent insolvency firm. However, the brokers who pass leads to lenders are often owned by insolvency practitioners. This can create a conflict of interest since the invoice finance provider, as secured creditor, can choose which administrator to appoint and when.

The boss of an invoice finance lender admitted the relationship between insolvency and invoice finance firms had “got silly”. He described the “worst cases” as “we [the insolvency firm] give you a client, you bust them, you get the termination fees and we get the administration”.
Brian Moore, who is leading a campaign for the regulation of the industry, called for an asset based finance ombudsmen and rules to prevent conflicts of interest between brokerages, insolvency firms and funders.

“We’re not against invoice finance,” he said. “It can be a good product that should be promoted, but only once the industry is regulated.”

Campaign for Regulation of Asset Based Finance

MarketInvoice coverage on BBC Radio 4 – Anil Stocker discusses the Government’s new ‘Funding for Lending’ scheme
Posted on August 1, 2012

Co-founder and Director of MarketInvoice, Anil Stocker, appeared on BBC Radio 4?s morning show along with Pierre Williams, spokesman for the Federation of Small Businesses, to discuss a new lending scheme called ‘Funding for Lending’.

The new scheme works on the principle that the UK goverment can borrow cheaper than SMEs, so in troubled times like now the goverment should pass on the benefit of that borrowing cost to small businesses who are struggling to stay afloat.

Stocker also spoke about how the demand for alternative finance has increase due to the restriction of bank finance. In this economy there are many SMEs who are solvent and able to grow, especially in the export industry, but are finding it hard to find financial support from traditional sources of finance. Banks tend to stay away from trade finance as it is deemed as risky, also it is currently been rained in by the banks under Basel III.

Struggling to find credit? Invoice finance may be for you
Banks are pushing invoice finance as an alternative to overdrafts so we talk to three businesses about their experience of using this form of finance

When it comes financing cash flow, banks prefer invoice finance over overdrafts
By Richard Tyler6:59PM BST 13 Jun 20111 Comment
“Giving a small business an overdraft is like handing a child a loaded gun,” a leading business banker has told MPs in the Commons.
Without sensing that he might have said the wrong thing, the banker went on to advocate invoice finance as “a highly inexpensive form of finance if used properly”.

Official surveys show demand from small businesses for overdrafts remains on the increase, with 35pc of firms applying in 2010 compared with only a quarter in 2007.
Banks, however, are less keen about overdrafts, as this banker speaking on condition of anonymity made clear. The part-nationalised banks – Royal Bank of Scotland and Lloyds Banking Group – may have pledged not to withdraw or alter the terms of agreed borrowing facilities before they mature, but that is not stopping them encouraging customers to shift onto other forms of finance.
While traditional bank lending to small businesses is still declining, lending against assets, like a company’s invoices, is growing. They rose by 9pc to £12.4bn in the first quarter of 2011, according to the latest figures from the Asset Based Lending Association.
The shift comes as the cost to the banks of providing overdrafts increases as they have to hold more capital against the facilities even if they are not drawn down by customers.
The banks are also working harder to reduce bad debts on their loan books and prefer to monitor a customer’s trading performance and reasons for needing credit, which invoice financing allows while an overdraft does not.

A significant change in the law in 2005 also meant that an overdraft is now classed as a fixed rather than a floating charge on a company’s assets. If a company goes bust, its overdraft provider falls behind other preferential creditors in the queue to recover any remaining cash.
For small businesses keen to borrow to finance growth, asking for the right kind of finance has become more essential as banks remain highly selective about which ones they back.
A survey for the Business Department found that in 2010 more than a third of all small businesses needing finance were turned down by their bank, up from only 14pc before the financial crisis took hold.

Invoice finance works with a finance supplier auditing a company’s customer base and setting credit limits on the amounts it is prepared to advance against business done with those customers.
Companies pay a fee when they draw down a percentage of the value of an invoice up until the date it is paid by the customer. The outstanding percentage of the invoice is then collected – either by the company’s credit department (invoice discounting) or by the finance provider (factoring) directly – minus further fees and any insurance charges.

The latest ABFA statistics show that more than 41,000 companies used asset based finance in March, down 2pc year on year.
Your Business asked three business owners about their experience of using invoice finance.

MANUFACTURING

Nick Williams is chairman of several construction products companies based in Cardiff, including Eurobond Laminates and Euroclad, and has used factoring for over 30 years.
He said the common criticism – that invoice finance is an expensive form of cash flow finance compared with a bank overdraft – is misplaced.
“By the time you do the borrowing on the money, the insurance and the administration charges, I believe in the round it’s not expensive. It’s not cheap but it’s usually not that bad,” he said.
Mr Williams said to be able to access short term cash when it was needed was worth the price and added that letting customers know they used a factor to collect their debts – in this case HSBC Factoring – encouraged customers to pay on time. “I believe that people pay their supplier somewhat quicker when that supplier has an open factor arrangement,” he said.
Mr Williams added that the additional outside scrutiny of the credit worthiness of some customers was also beneficial. “They will come in and audit and give you a view on how much credit to give your customers. It lets you know whether your factor thinks you are dealing with sound and reputable businesses. That’s one of the good things about factoring. It makes you realise who is good on your sales ledger and who is not. As much as it is frustrating not to do a sale, it’s even more frustrating if you don’t get paid.”
But Mr Williams said businesses had to be careful how they used the cash advance. Only profits should be committed to longer term investments, he warned. “Small businesses may think they have a lot of cash coming in and go and buy a building. In my late 20s, I made mistakes like that,” he said.
Mr Williams said finance suppliers could also restrict access to credit on certain customers just as banks have done with debt facilities.
“The reality of the situation is that with 75pc of the mainstream banks in this country there is more demand than they have an appetite for supply. That could be the situation with a factoring situation as well. Your ongoing ability to draw credit can be dependent on credit limits on each individual customer. When the credit limit disappears you can’t access the cash.”
He continued: “In a good market when getting credit cover on customers is easy there’s no problem. The credit limits you get are a lot better than in a tight market. It means you have to be judgmental on how you use the cash.”

RECRUITMENT

Nick Berry, founder of Northampton-based NRS Recruitment, said he used factoring to help finance the launch of his business eight years ago. He has to pay people he places in work on a weekly and monthly basis but may only get paid by his client two months later.
“The banks will not give you anything from day one in business but the factors can see your live invoices,” he said.
Cash flows more smoothly now the 20-person company is well established, but Mr Berry retains the financing with specialist provider IGF because it gives him “extra peace of mind”.
The external scrutiny also helps him avoid trading pitfalls, he said. “If there’s an issue they will tell me straight away. They rang up and said Nick you have £2.5m with that client, try and phase your business down with them as they are going to go bust.”
Two months ago one of the big supermarket chains changed its accounting procedures that led to a delay in invoices being paid, Mr Berry added. “We have £800,000 with them and the factoring gave us that extra period of time we needed. The bank would not do that.”
Mr Berry has looked to reduce the cost of the financing and has shifted away from full open factoring to a hybrid version where NRS collects more of the cash. The move has saved him £40,000 a year.

ELECTRONICS

Mark Goldby, finance director of SMS Electronics, a bespoke electronics manufacturer based in Beeston, Nottingham, said some finance providers were better than others and it was worth shopping around.
“We changed in early 2010 from one invoice finance provider to another. We were with a top four bank – one of the banks from Scotland – but we found during 2009 the facility was restricted. It kept getting squeezed as the bank wanted to reduce its risk by reducing the credit available on certain customers. That was no good for us.” He said he checked out all the main banks’ services but opted for a specialist provider, Leumi ABL. “They have a completely different appetite for this type of risk.”
Mr Goldby said the financing increased as the £50m turnover company increased sales, making it more flexible than a fixed overdraft. He also only drew down the cash when the company needed it. “You are paying for the cash the moment you draw on it,” he said.
“Invoice finance is a more expensive facility to run in comparison to a traditional overdraft but I have not minded paying the premium because I know the availability of the funding is there,” he said.
He added: “Overdrafts are more flexible but I have not used one before because there was not the appropriate security available. We have not had the amount of freehold property on the balance sheet where the banks would be happy to give us a nice overdraft. If you are going to focus your security around your debt book why not forget that and go straight for an invoice finance arrangement”.

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Lisa Mayers
Email: lisa.mayers@ashleyfinance.co.uk
Phone: 0161 233 6373