Invoice finance firms 'profit’ from company failures

| August 17, 2012 | 0 Comments

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.

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.

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 (Other OTC: TTFNF.PKnews) 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.”

Has your business experienced this issue? Email james.hurley@telegraph.co.uk

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