The Brumark Ruling

Factoring and the Brumark ruling

Prior to 2001 the banks grudgingly lent on overdraft to the SME sector, safe in the knowledge that their fixed & floating charge placed them near the top of the pile in the event of receivership or liquidation as the proceeds from the outstanding debts would be payable to the fixed charge-holder.

2001 was a pivotal year for SME funding as a decision by the Privy Council in the Brumark case stated that a company’s outstanding debts should not come within the terms of a fixed charge but were incorporated within the floating charge instead.

This had the effect of pushing the banks too far down the pecking order for their liking, resulting in them hurriedly offloading as much of their overdraft lending to the SME sector onto their factoring subsidiaries where both the returns and security were better.

This partly accounts for the huge growth in factoring since that year whilst in contrast overdraft funding has fallen from £22billion in 1992 to less than £9billion last year.

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