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General

In a recent study by the Institute of Directors (IoD) is was found that 1 in 4 UK businesses have tried to access finance via their banks. Unfortunately almost 60% of those businesses had their applications rejected. What was more worrying was that 83% of those businesses has received no information regarding the available alternatives.

The banks should be offering the government’s Enterprise Finance Guarantee Scheme (EFG) whereby the government guarantee 75% of the facility thus limiting the banks exposure to 25%. There is an argument as to why the banks would lend 25% against a project or to a business that they didn’t believe in but it does at least limit their exposure. They should at least be promoting this facility but it seems to face the same issued that the SFLGS did in terms of lack of acceptance by the banks.

On that basis it is interesting to see invoice finance providers bolstering their offerings with the EFG scheme. I am not sure how active they are in lending but I have seen a fair amount of PR relating to invoice finance providers offering the EFG which is more than can be said of the banks.

But realistically what are the finance options outside the banks?

Well beyond the banks asset finance arms who offer finance against real business assets. They tend to avoid softer assets such as IT and office furniture but will happily consider plant and machinery along with vehicles. Just because you bank has said no to asset finance other options do exist.

The same can be said with invoice finance. The bank invoice finance arms are the most risk averse. As such, just because you have been told ‘no’ does not mean there is not a suitable facility out there for you. The independent invoice finance market can deal with most scenarios.

The commercial mortgage market is severely subdued and lacks alternatives outside the banks. Roughly 2 years ago a dozen or so lenders withdrew from the market literally overnight and that vacuum remains to be filled.

I think businesses need to be flexible in their approach to sourcing finance and maximise the security that sits within the business. That means seeking specialist forms of finance from specialised providers. If your bank can offer 80% against your debtors can an independent specialist invoice discounting provider offer more? The same applies to asset finance and commercial mortgages – shop around and maximise the amount of finance you can generate.

I have been approached by a client today who has a ‘non-recourse’ facility with an independent invoice factoring company. This is to say they have a credit insurance policy to cover their debtor book. As such the client should not incur any bad debts as long as they operate within the given credit limits.

However, it has transpired that a customer of our client has gone under owing them £150,000. There was a £150,000 credit limit in place so the client thought everything was covered.

The insurance company has now come back and queried certain procedures relating to timesheets and the dates of invoices and our client has provided everything that has been asked.

In short they insurance company has paid £60,000 and is disputing the balance on what appears to be minor technicalities.

It is not my place to say who is in the right or wrong here but the important facts are that the independent invoice finance company advised the client he was set up on their insurance. Now that insurance company has disputed the claim the client is now left owing the lender for the balance of £90,000.

Without access to the full facts it is hard, in fact impossible, to establish blame. The important thing is to highlight that you should request full terms and conditions for any credit insurance that your lender arranges for you. You should ensure this has been received and understood prior to signing any agreement. Importantly you should also ensure that they can provide the limits that you require.

I have recently taken on a case for a client who is leaving a back office service provider and wanted to highlight some risks associated with employing such a company.

My client is a recruitment business who use a back office service provider to raise invoices, do the payroll, credit control, etc.. This service is similar to factoring but is typically provided to temporary recruitment agencies as an opportunity to outsource almost everyting so the business van focus on sales and placements.

These services receive varied feedback in terms of service levels but unfortunately in this instance the implications are for more serious. The lender concerned has failed to pay over circa £500,000 of monies that was due to HMRC and do not appear to be in any position to do so soon. It would appear that our client remains ultimately responsible for bringing the situation up to date with HMRC.

I understand there was a similar situation with a payroll finance company called Wageroller who went under leaving their clients owing large sums to HMRC.

There are obviously some very reputable providers and Lloyds TSB are possibly the largest with their Cash Friday facility. The fact remains that not all other providers seem to be as reputable or as financially robust so be careful.

I have not mentioned the providers name as I have not spoken to them to hear if there is another side to the story. It does however raise concerns and is certainly worth a post.

Interest rates in the form of the Bank of England base rate have remained unchanged at 0.5% for the last 17 months. These low base rates seem attractive to borrowers but are crippling savers who rely on the income their savings generate.

Will rates rise? I think the evidence overwhelmingly suggests that these ultra low rates are not sustainable and as such, yes rates will rise. In a poll of economists by Reuters (29 July) the conclusions were that interest rates would rise from April-June 2011. It was thought that they would rise to 1.5% be the end of 2011.

If you are a factoring client, how will the impact on your costs? Well in some cases it will obviously increase your costs of borrowing money as your discounting fee is made up of a margin and a base rate. As the base rate rises then your costs would increase surely? The answer is maybe. It will differ from lender to lender.

HSBC invoice finance for example have no minimum base rate so any increase from the 0.5% Bank of England base rate will be felt by their clients who are currently enjoying these very low rates.

However, Bibby Financial Services are currently using 3 month LIBOR as a base rate and in the quotations I have seen are using a minimum base rate of 3%. This means that until the base rate (3 month LIBOR in this instance) increases above 3% their clients will not be effected by the potential base increases.

Close Invoice Finance use 1 month LIBOR as a base rate but have an overall minimum discounting fee of 4.5% . So any base rate increases would only impact on the clients of Close Invoice Finance if their total discounting fee increases above 4.5%.

Looking at the invoice finance market in it’s entirety there are a lot of clients who won’t feel the impact of any impending rate increases for some time.

Is this good news? It depends on how you view matters but some may argue that the ones who will not feel the effect of the increases are paying too much at the moment anyway. Then again, you can only choose the best of the offers that are made available to you.

Bibby Financial Services have acquired the book of invoice factoring company Aston Rothbury. It is understood that Bibby have absorbed this book into their very successful office in Hastings.

In terms of client numbers we have heard that it was only 40 clients.

The same Bibby office also acquired the Arbuthnot office last year but some of the staff have since left and set up Innovation Finance.

We have seen a fair amount of consolidation in the invoice finance market over the last few years and some lenders have left the market for good.

However, in recent years we have seen some new lenders enter the market and I wish them well. Personally I think there is always room for lenders who want to provide a good service to clients and if their ‘positioning’ is niche in anyway I think it is fantastic.

Gener8 Finance seem to have been well accepted and client numbers have swelled. They are targeting the smaller end of the market with a view of providing invoice discounting facilities with flat fee structures to smaller companies who normally only attract factoring offers. I am not sure they are actually offering traditional confidential invoice discounting facilities in the majority of instances but clients are signing up so they are doing something right.

Bob Crumbley who was at London Scottish has set up a company called Team Factors with John Schulman who was at Coface. I have seen very little PR about the company but understand they they are also looking at providing good old fashioned factoring services with good service levels to small businesses. I am not sure how they are fairing but wish them every success.

We have also seen the team who were absorbed by Bibby when they bought Arbuthnot set up again on their own as Innovation Finance. It is very early days and by their own admission they are still finding their feet but I will be watching their progress with interest. Again I wish them every success.

In dealing with various businesses and lenders as an invoice finance broker the biggest frustration is when a lender takes a long time to say ‘no’.

In my position as a broker I always aim to manage any clients expectations in terms of what can be reallistically achieved in the market given their particular circumstances. In dealing with any lender I try and highlight any issues upfront so that our energies can be focussed on mitigating the risks associated with those issues. My aim in doing this is to be honest and maintain a solid reputation but also to avoid any last minute issues. If a lender discovers the deal they have been looking at for the last 6 weeks is not what they thought because of some ‘skeleton in the closet’ then it will come as no suprise that they may change or retract their original offer.

The flip side of this is when a lender is provided full information on day one and the risks have clearly being highlighted to them. Yet after 2 months of visits and negotiations they say ‘no’ and the reason given is what was flagged into them in the first instance. This is frustrating for the broker such as myself but for the business concerned can be catostrophic.

In the most recent instance of this kind I had a client who had breached a facility with the invoice finance arm of a major bank. There had been a number of fairly minor breaches over a 5 month period and as such the lender had given the client 3 months notice to find an alternaitive funder. I approached an independent lender and flagged in the issues asking at the end of my email, “Given these breaches could you assist?”. The lender assured me they still had an appetite to assist and that their credit team were on board. They went to various meeting and chased the prospect for a decision until he finally accepted their terms. A full pre lend survey was done a month into this process and the feedback was that the survey had gone well. However another month further down the line and only when I phoned for an update was I told the facility had been declined. ‘Why?’, I asked. ‘The client has breached his facility with the existing provider’, was the response. In instances like that you have to laugh or you would cry. However, the implication for the client was that in less than a month the existing provider would be looking for full repayment and as such his business was at risk. The lender concerned made apologies and moved on to tell another broker how their ‘national, local and personal’ presence is best for their clients. I have to say I disagree. This has only happened to me twice this year and both times, despite having the assurances of senior people, this same lender have dropped out at the last minute after a protracted process and have declined the deal based on something they were aware of on day one. The lender concerned will not be dealing with any introductions from me going forward having shown it is not an issue with individuals or regions but a company wide problem.

I am writing this to share an experience so that clients don’t make the same mistake. So how do you ensure this doesn’t happen to you? In time critical situations like the one I have described I think it is important to run at least 2 invoice finance companies in tandem through the application process. Be totally upfront with them from the outset and highlight any risks to them. This way they can look to structure a facility that meets your needs but also mitigates their concerns over risks. The time in working with 2 lenders until you have credit backed offers will be repaid in peace of mind and in ensuring you are not back at square one should a lender decide they no longer have an appetite to assist you.

The Hidden Costs of Invoice Factoring

Typically an invoice factoring company will quote two headline rates – service fee and discounting margin. The service fee is quoted as a percentage and is applied to the gross value of each invoice notified. The annual service fee charged by factoring companies is therefore the percentage service fee applied to the gross turnover. The discounting margin is the percentage above the base rate that an invoice factoring company charges for the amount that they have advanced to you. The discounting fee equates to the interest rate that you would pay on an overdraft facility.

Beyond these headline rates are charges that are perhaps not so obvious and can make the comparison of facilities from different lenders quite challenging. These are a few of the charges that you should be asking about:

The base rate and minimum base rate. Some invoice factoring companies will quote over bank base rate while some will quote over 3 month LIBOR. It is important to understand how these differ and how they fluctuate. Some lenders will also have a minimum base rate which when base rates are very low come into effect. It is important to ask what the minimum base rate is as this can have an impact on the amount of discounting fees that you pay as a client.

Minimum service fee. All lenders will implement a minimum service fee and this can be set as a monthly, quarterly or annually paid fee. A major variable in calculating the service fee that you pay is turnover. If your turnover should drop dramatically and the invoice factoring company does not recover the fees they had expected then the minimum fee will kick in.

Audit fees are also charged by some lenders whereas as some other lenders include this as part of the service. If you are comparing costs and a lender is charging £500 a quarter for audit fees then it is important you are aware of this.

CHAPS transfers are transfers that allow you access to your cash on the same day. These costs can be significant as in many cases people will use these on a daily basis. These costs can vary from lender to lender and it is important to take these into account.

Arrangement fees are charged by some lenders and are a type of fee we are seeing creep into the pricing models of more and more lenders. It is important to remember that the service fee you pay is applied to the balance of your ledger when you commence so there is already a sizable fee to pay on day one. The addition of a separate arrangement fee obviously adds to this.

Legal documentation fees are charged by many lenders and again differ from a nominal sum to quite significant amounts. This can be on top of an arrangement fee.

Refactoring fees are charged by some lenders when they recourse invoices back to you as an invoice factoring client. That means that when an unpaid invoice ages beyond the funding period you have agreed with a lender they will pass this invoice back to you and charge you a percentage fee for doing so. This can be frustrating for full factoring clients because they have paid a service fee to a lender to not only provide finance but also the collect in invoices on behalf of the client. In this instance they are actually charging you more for not providing a service you have already paid for. The logic behind it is that it encourages you to get involved and help collect in the debt or at least provide them with information such as a proof of delivery to help the factoring company resolve any query.

To fully understand the list of charges of any individual invoice factoring company it is important to request a list of their disbursements.

In discussing the charges above it is important to remember that invoice factoring can be labour intensive for the invoice factoring company and if they are providing a good service they deserve to be charging a reasonable and fair amount for that service. It also important to understand what you are receiving for your money. In terms of credit control how does the lender you are speaking to go about the credit control? Some lenders will simply send out monthly statements and a series of automated letters and this may work for your debtors. Other lenders will telephone chase every invoice when it falls due and as such are providing a more hands on service and perhaps deserve to charge more for this. The question is what level of service are you looking for as a client?

The costs described above should also be offset against the time that an invoice factoring service frees up for the client. Will this time be focused on sales and growing the business? If so what are the additional benefits? In addition what can be done with the cash generated? Be entrepreneurial – if you now have an additional amount of money in the business what can you do with it? How much more money can you make with it?

The key is to understand what you will be paying for the service that you receive. By understanding all the potential fees you can compare the expected annual costs of each invoice factoring offer you receive. By also understanding what level of service is being provided you ensure you choose the offer that represents the best value to your business.