Invoice Finance Companies Benefiting from Business Failures
According to a story in The Daily Telegraph, allegations have been made that some invoice finance firms are profiting from putting clients into administration.
The accusations are such that pressure group Campaign for Regulation of Asset Based Finance is preparing a submission to the Parliamentary Commission on Banking Standards.
The Campaign’s spokesperson, Brian Moore, has called this profiteering as "unacceptable behaviour" and is pushing for the factoring and invoice discounting industry to become regulated.
Mr Moore says that the termination and collection fees charged by some invoice finance companies when a business "goes to the wall" are often excessive, often being as much as 20% of the entire ledger rather than the outstanding balance and have even been charged when no monies are due to the invoice finance providers.
Moore also alleges that some healthy firms have been "unnecessarily forced into administration" at the expense of creditors, HMRC and other stakeholders in the business whilst the invoice discounting firms profit from the forced failure themselves.
In the Telegraph story, Moore’s concerns are backed up by Ian Johnson, an independent broker at Factoring Solutions, who says that:
“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.”
Johnson, from his perspective inside the invoice factoring industry also commented that there was an “unhealthy relationship between certain [invoice finance] companies and the insolvency profession” and accused them of abusing their position of power over the finances of small businesses.
The Telegraph had contact from one owner of one manufacturing business that was unnecessarily put into administration. The cost was 100 jobs, £100,000 to HMRC and a "hefty" termination fee that apparently stopped potential funders who were willing to save the manufacturing firm. It was alleged that, despite a huge offer to keep the company going, the invoice factoring firm made a whopping £300,000 from the administration.
An accountant, who did not wish to be named, also backed up the allegations, saying that, whist the majority of service providers were reputable, there were people in the industry who, he was sure, would put firms into administration purely to make money from them.
The Campaign for Regulation of the Asset Based Finance Industry believes that £5 billion could be "clawed back" from the industry to HMRC and that there must be a comprehensive review of asset based finance with an ombudsman to oversee the sector and a clear separation between the administrators and the finance companies.
For more information see the business advice articles on Debt Factoring & Invoice Discounting, The Difference between Factoring and Invoice Discounting and Invoice Finance Tips.