Factoring – The ‘chill’ factor

It’s cool. It’s sexy. It’s drawing American players into the market and it’s triggering fierce competition among established UK rivals. What is it? It’s factoring and invoice discounting. It’s so cool, in fact, it’s even got a new name – ‘asset-based finance’, as the industry likes to be known these days.

Even the industry’s body, the Factors and Discounters Association (FDA), is rumoured to be becoming uncomfortable with its name. Factoring, as everyone knows, is dull. Asset-based finance is exciting. Industry statistics suggest that factoring and invoice discounting, or whatever you call the service of advancing finance against the security of a company’s debtors, is in fashion.

The FDA’s 37 members now handle invoices worth more than #40bn on behalf of clients and the market continues to grow at a rate of 15-20% a year.

Funds provided by factors and invoice discounters have more than doubled in the last four years, injecting an additional #3.4bn liquidity into the business sector.

The general consensus is that factoring is at last leaving its old, dubious image behind. Ten years ago, a company that signed up for factoring faced being stigmatised as an unreliable trading partner with a bad debt problem and an uncertain future.

‘I don’t think that any client that was factoring at that time could get away from the fact that everyone else thought they were about to go down the tubes,’ says Charles Anderson, managing director of BNY International.

Shaking off the old image

But that image is now way out of date. Anderson refers to that leader of business fashion, the USA, where factoring has been underway for 60 years. ‘In the rag trade in New York, if you don’t factor your invoices, they wonder what has happened,’ he says. Ross Clarkson of Alex Lawrie agrees. ‘Factoring was seen as being the lending of last resort for companies about to go under, but that’s changed,’ he says.

One reason is simply that businesses that used factoring ten years ago are still around. ‘If they are still going, it becomes clear that factoring is not for companies that are going belly-up,’ Clarkson says.

If the shady image has gone, the new look that the factoring companies are trying to build is dynamic. Factoring, and invoice discounting – which is, in fact, growing at the fastest rate – is a key financing tool for growing companies, they say.

‘There are some high-profile areas where factoring has become a really key tool,’ says Clarkson. He uses management buyouts as an example. ‘If you are a businessman who has just spent a lot of money on buying a company, where are you going to get your working capital from?

‘It’s also for sexy companies – growing companies. Those are the ones we want to support.’ If Alex Lawrie is excited by the potential to finance MBOs, so is BNY International. ‘I would see our business seeking to play a bigger role in providing MBO finance,’ confirms Anderson. ‘It’s a huge market.’

The passage of time is one key reason why factoring has become so popular.

After all, even adolescents with dubious personal habits generally grow up to be respectable members of the community. Over time, the range of companies that use a factoring or invoice discounting service has increased, making stereotyping difficult.

‘Almost every type of company uses factoring and invoice discounting, including larger companies, not just small ones,’ says Anderson. ‘The demographics of the businesses that use factors are broadening and deepening.’

Murray Chisholm, sales and marketing director for TSB Factors, confirms his assessment. ‘If you go and see companies now, they understand the rudiments of factoring and invoice discounting,’ he says.

‘That’s partly because there has been more publicity for the product. Secondly, it’s because I don’t think there is a company in the land that doesn’t receive invoices that have been factored. And thirdly, the accountancy profession has extolled the virtues of factoring as a first-line financial product. More of their clients are using it.’

Specialist factoring companies may also be doing so well now because of the past reluctance of the clearing banks to fund smaller businesses.

‘Banks become very risk averse at every recession, particularly in the smaller end of the market,’ says David Marsden, a chartered accountant and chairman of RDM Factors, which specialises in companies with turnovers typically of less than #5m.

Avoiding personal asset risks

As Marsden points out, banks want hard assets as security, yet ‘key person’ businesses, such as in the PR industry, have few of these. Factoring provides an alternative to risking personal assets.

One of the most important current drivers behind the changing image of the factoring industry is increased competition. A recent influx of American players into the UK market has emphasised that this is a serious and legitimate business to be in.

If the Americans are riding in for a piece of the action, there have to be some sound business reasons why. It is the Americans too who are boosting the change in emphasis away from ‘factoring’ towards ‘asset-based finance’.

Anderson points to the range of services on offer from BNY International, including stock finance. ‘We will be competing with banks in more areas,’ he says. ‘The Americans’ hope and expectation is that they can do these things better than the banks can. It’s about bringing asset financing together under one roof.’

BNY International is the outcome of the Bank of New York’s acquisition of International Factors from Lloyds TSB this January, following the purchase of UCB in July 1997. The two acquisitions pushed Bank of New York to the position of UK market leader in the space of six months.

Another US contender, Bank of America, entered the UK market cold in May 1997 and has been building up its asset finance business from scratch, though the bank itself has been active in London since the 1930s.

An even more recent UK market entrant is GE Capital Commercial Finance, part of the giant US GE Capital group, which sees the UK as a growth market for asset-based lending. ‘We are looking at providing a US-style delivery of commercial finance,’ says managing director Gary Edwards. ‘It’s going to be a commercial finance business.

‘While the present UK market focuses on factoring and invoice discounting, it is not our intention to limit ourselves to that.’ GE will offer lending against debtors, but also against stock and other assets. ‘We are already Europe’s largest leasing business, so we can fold in other elements to provide a total package as required,’ Edwards says.

GE Capital is aiming at the mid-market upwards. Bank of America is after companies looking for finance in the region of #5m and most of the Americans seem to be concentrating on the top end of the market. ‘In our book, that’s big market stuff,’ says Alex Lawrie’s Clarkson.

‘There are two groups developing in the marketplace. There are the traditional factoring companies like ourselves, and there are the niche players, specialists at the high-end. They are more involved in refinancing, in big business.’

More flexible than the banks

‘We are very much looking to the upper end of the middle market, offering an asset-based lending solution,’ confirms Paul Hancock, Bank of America senior vice president.

‘For certain companies, it can offer more flexible and reliable finance than the banks.’

Most Bank of America clients would have turnovers around the #20m mark.

Bank of America lends most often against receivables, but can extend further funds against stock, plant and machinery, and ultimately land and buildings. ‘We are the new bankers,’ claims Hancock.

Lending against debtors and stock takes the form of revolving credit, while plant and machinery loans have a fixed term. The receivables service is essentially invoice discounting – customers don’t know about it, and companies can draw down the funds that they want. ‘We will do receivables only, but we believe we bring more value to the party when we lend against other assets,’ Hancock says.

‘Often the company is growing fast. We take a view more on the fact that we like the story the entrepreneur has. And we have our insurance policy in the assets. If we have the receivables and the stock, we have a pretty good handle on what’s happening in the company so we feel more comfortable to advance funds against plant and machinery.

‘It’s the sort of risk you can take when you are tracking those other assets. But if someone came to me and said he wanted a plant and machinery loan and wasn’t giving us both debtors and stock, we wouldn’t do it.’

There is a lot happening in the factoring world. But has the old image really gone? The answer really does seem to be yes. Anderson believes the industry is dynamic at the moment. ‘Sales teams are leaving one company and joining another,’ he notes.

That’s the kind of skirmishing more commonly associated with high-flying corporate finance. But as Anderson says: ‘All the things you associate with a sexier market are happening here at the moment.’

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