There have been a stream of complaints over the years about the alleged rip off charges imposed by some factoring companies on termination of their agreements, usually when the client has ceased to trade.
In most cases there is very little that the client can do about it as if the company has gone bust the directors often don’t have the funds to launch a legal case so the factoring company gets away with it.
Termination charges have long been a large source of extra profit for many invoice finance companies with the chief executive of one such company telling me a few years ago that such fees made up 25% of their profits.
Finally one factoring client decided to do something about it as when Leumi ABL Ltd decided that a suitable fee for collecting out the ledger of their client Cobra Beer was an eye watering £1.216m but the guarantors of Cobra’s facility who would probably have ended up stumping up for the fees said that enough was enough and launched a legal case against Leumi.
It seems that the guarantors who had indemnified Leumi against all sums due and payable under Cobra’s invoice finance agreement (which included any and all termination fees which Leumi subsequently added to the account) paid Leumi the not inconsiderable sum of £950,000 but the factoring company deemed that not to be enough and demanded a further £490,000 but the guarantors had enough of the factoring company’s greed and launched legal proceedings.
When it came to court the judge deemed that Leumi’s actual costs in collecting out the ledger had amounted to £33,250 and that they should not have charged the client / guarantor and more than 4% of the amounts collected.
Far from having to pay the additional £490,000 that Leumi had demanded the judge decreed that the client / guarantor had already overpaid £735,000 and unless an appeal is launched it looks like the factoring company is going to have to refund a large sum of money. In addition to having to repay the vast majority of the fees charged by Leumi ABL it appears that they are also responsible for both sides legal fees which are rumoured to total £3m.
Leumi ABL don’t seem to be having a good year as in addition to having to repay these fees plus hefty legal costs they have also lost a substantial seven figure sum in the collapse of First Capital Factors which they were funding plus there are rumours doing the rounds of another substantial seven figure loss from the collapse of another of their clients and one must wonder how much more the parent company bank will put up with before pulling the plug or at the very least changing the senior management.
Although the Cobra Beer facility was probably invoice discounting with little or no sales administration provided by Leumi it never ceases to amaze me how some invoice finance companies can charge their clients a service fee for undertaking the administration of the sales ledger under a factoring arrangement then if the poor client ceases to trade they charge an additional (and often extortionate) fee for doing exactly what they were paid to do in the first place.
Hopefully this legal ruling will provide a salutary lesson to the greedier factoring companies who may well moderate their greed in the future.
Four years ago I wrote a piece about a “Receivables Report Intermediary Index” published in a journal well known within factoring circles (https://factoringblog.co.uk/receivables-report-intermediary-index/) stating that under no circumstances would I deal with a number of the factoring companies named in the top few and in the intervening years nothing has changed to make me change my view.
Earlier this year that very same journal published it’s most recent version of the good and great and the winner was the very same Leumi ABL that has just received a severe telling off by a High Court judge for it’s practices.
Irrelevant to this article but I was flabbergasted at the very high position achieved this year by a factoring company with a very poor reputation within the industry and who I wouldn’t touch with a barge pole