Factoring companies 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 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.”
The article was written by James Hurley and appeared in the Daily Telegraph on 16th August 2012.