Small Business, Enterprise and Employment Bill 2014-15 - letter sent to Vince Cable MP

Dear Minister,

I note that Small Business, Enterprise and Employment Bill 2014-15 is presently working its way through parliament.  Part of the bill covers asset based lending (factoring and invoice discounting) with the outlawing of clauses preventing the sale of invoices, known as 'bans on assignment'.  These clauses are often demanded by larger businesses, particularly in the retail sector, preventing their SME suppliers from using the invoices they issue to secure funding to grow their businesses for good reason. 

From the Financial Times:

“However, several business owners have told the Financial Times that alarm bells would ring in their finance departments if they discovered that a supplier had employed a factoring company to chase its bills.”
“John Readman, commercial director of Leeds-based Search Laboratory, said news that a factor had taken over a supplier’s order book automatically triggers a “flag” for his accounts department to investigate the company’s viability.”
“Whether it is reality or not it is a perception issue,” he said. “Factoring is where you lose control [of the relationship] with the client.” The client loses control of their own destiny once they sign a factoring agreement http://www.ft.com/cms/s/0/943b3bd0-f446-11e2-a62e-00144feabdc0.html#axzz2bnDdX7KL

Has the Government not learnt any thing from the Tomlinson Report?  Lawrence high lighted those aspects of commercial lending that were supposed to be covered by the regulations applicable to banking.  RBS is having to make wholesale reforms to significant areas of their commercial lending, but does not have to touch its factoring division as the bank alleges it is not covered by any regulation.

The factoring industry has made a poor attempt to paper over wide spread fraud and unacceptable practises in the industry by most of the high street banks and a number of private providers.  Frances Coulson in her testimony to the Treasury Select committee gave an example where a factoring company had charged £2-300K in termination fees, having never leant a penny.  Who was the loser? HMRC

A member of staff when asked at Close Brothers why do you apply termination fees?  Replied “It is better for us [Close Brothers] to get the money than HMRC”.  One factoring company, 70% oif their turnover, not profit was based upon termination fees from companies that they had put into insolvency against the wishes of the directors of their clients.

These companies that are banning assignment of invoices are doing so to protect themselves from suppliers who are forced into insolvency by factoring company for pure greed at the expense of unsecured creditors.  Why would you make £40K a year legitimately when you can make £400K by putting your client into insolvency and applying ‘fraudulent’ termination fees?

Asset based finance industry lends £18.9bn, to over 40,000 companies employing around 1M people in the last quarter, the practice is only covered by the Sale of Goods Act 1979, which was not envisaged to be the only recourse for people who have lost their business, livelihood and possibly their homes.

I have attached one of many letters that RABF has seen from Lloyds Commercial Finance which illustrates graphically the catch 22 that SME’s are in once they sign an asset based contract.

We are therefore requesting that you remove this part of the Bill covering ‘ban on assignments’ as it goes through Parliament.

We would further request a meeting with your self to explain the dire state that asset based lending is in within the UK and the affect that being unregulated is having on UK SME’s.  A significant number of solvent businesses are being closed for greed by their factoring company by a number of questionable clauses in their contracts.

Best wishes

Brian Moore

For and Behalf of

The Campaign for the Regulation of the Asset Based Finance Industry

07825050704

www.rabf.org.uk