It has recently been reported that Aldermore has taken a 48% stake in the parent company of a group that includes a commercial finance broking outfit called Asset Finance Solutions (UK) Ltd and another called Synergy Commercial Finance Ltd
This is an unwelcome step to the rest of the broking market who may be unwilling to introduce business to a finance company that owns one of their competitors.
The home pages of both Asset Finance Solutions (UK) Ltd and Synergy Commercial Finance’s websites states quite clearly that they are independent commercial finance brokerages not lenders” but ethically how can they state that they are independent when a funder has a significant shareholding in the parent company as well as two directors on the board.
The home page of Asset Finance Solutions states quite proudly on their home page that “Asset Finance Solutions was formed in 2005 and has quickly grown to be one of the UK’s leading independent funding providers” which again is misleading.
Both company websites have either a blog or news section yet neither mentions anything that might cause readers to question exactly how independent they are as any comment concerning their new substantial shareholder is conspicuous by it’s absence. One wonders why the appointment of a new sales director is deemed to be newsworthy but the selling of a significant share stake to a challenger bank is not.
As a specialist factoring broker I have long refused to deal with Aldermore so their stake in a brokerage won’t affect me directly but I wonder how companies that approach either AFS or SCF expecting independent advice will feel if they are introduced to Aldermore without being told that they are significant shareholders.
Aldermore aren’t the first to try to buy market share by acquiring their own broking firm but it didn’t work out too well for the first factoring company that tried it and they quickly gave up the pretence and changed their subsidiary’s name to their own.
Presumably there are going to be a number of genuinely independent commercial finance brokers who will no longer wish to deal with Aldermore as they will be worried that their clients will find their way into the database of Aldermore’s broking arm and in all honesty I can’t blame them.
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.
Lloyds Bank Commercial Finance has just circulated a press release stating that any broker or introducer who introduces them to a factoring or invoice discounting client will receive a commission of 40% of their service fee for the life of the facility.
This is significantly higher than the industry norm and is potentially highly lucrative for factoring brokers many of whom will now start to introduce new clients to Lloyds Bank Commercial Finance for the their high rewards alone irrespective of whether that particular factoring company is the best fit for the company or not.
Regular readers of the Factoring Blog will be aware that my opinion of the average factoring broker is already pretty low having referred to their behaviour as vultures in my previous post but the likelihood is that many brokers will shed off their vulture like scavenging and take on new personas of the porcine kind as they queue up to feed at the trough that is Lloyds Bank Commercial Finance.
Unfortunately their behaviour will lower their standing even more as the main reason for the existence of specialised factoring brokers is to offer companies the benefit of their expertise and not to line their own pockets.
Discussing this press release with some of my factoring friends I was told by one that he had approached a new broker only to be told “Why should I deal with you when Lloyds Bank Commercial Finance will pay me so much more. That should really serve as a warning to any company who uses a factoring broker and finds himself introduced to Lloyds as it is highly likely that the introduction has been made in the broker’s best interests and not your own, which is a shocking state of affairs.
Another factoring friend asked who was ultimately going to be paying for this huge commission and they suggested that it was either going to be the client in the form of higher service fees or else the service levels would be pared back even more with an effective reduction in the factor’s sales ledger administration and credit control creating savings to fund the commissions.
A third factoring friend told me that a few of their introducers had already been in contact asking whether they would match Lloyds only to be told that they would gladly do so as long as the introducer didn’t mind them increasing the rates to the client to cover the increase as they didn’t intend to reduce their service levels to compensate.
Factoring Solutions prides itself on offering an ethical broking service only ever introducing clients to what we consider to be the most appropriate factoring company for their needs. We have never dealt with Lloyds partly because there are independent factoring companies that offer higher service levels at comparative costs and we won’t be starting to introduce business to them now despite the high rewards on offer from them.
If any company wishes to speak to an independent factoring broker who places his clients’ needs above his own please feel free to contact Factoring Solutions on 01827 707680
I had lunch last week with a director of a factoring company and he laughingly thanked me for not trying to sell him the client list of First Capital Factors which was a small independent factoring company that had recently gone into administration.
It seems that once the Administration became public knowledge several vultures factoring brokers obtained a list of their clients from Companies House and tried their hardest to hawk the list around to a few factoring companies as well as trying to get their clients on board so that they could place them elsewhere, earning nice fees in the process.
As if that wasn’t bad enough someone calling herself Clair Tweedy started contacting the clients claiming that she worked for NACFB which she stated was part of the Government and she told them that funding of First Capital Factors clients would cease within 90 days but that she could help them relocate to a new factoring company.
Yuk – despicable behaviour but having been broking for 17 years I shouldn’t be surprised by anything any more from the huge commissions that some of the larger factoring brokers demand for introducing clients, to the churning of clients at the end of the year to get another introductory fee but contacting factoring company clients and blatantly misrepresenting who you are is a new low even for this industry.
My understanding of the situation is that Leumi ABL have taken over the debtor book of First Capital and have continued funding but those companies that don’t really fit into their client profile will be asked to find alternative factoring arrangements but will be given time to do so and will not just be thrown out on their metaphorical ears.
Anyone that wishes help in finding another factoring company but doesn’t want to deal with one of the vultures currently pecking at the carcass please don’t hesitate to contact me if you want to deal with an ethical broker who refuses to join in with this unseemly feeding frenzy
Regular Factoring Blog readers will be aware that I have a bee in my bonnet about companies within our industry that promote themselves by knocking their competitors and I have already outed Market Invoice and Simplicity for these practices and now it appears that Nucleus Commercial Finance has joined this select band.
Not only have Nucleus just come out with a promotion designed to frighten people away from their competitors but I received details of their E Book in an exceedingly patronising email from someone that I had never heard of:-
When securing invoice finance for your clients, you need to make sure they understand the additional fees the finance might come with, and the total overall cost. Question is, are you aware of the potential hidden fees?
The E Book talks about the hidden fees in commercial loans but those allegedly hidden fees include take-one fees so they are obviously talking about invoice finance. Whilst I don’t deal with every factoring company and are therefore not privy to their operations, the ones that I do deal with and that includes the independent market leader are quite open about their additional fees with at least one giving all prospective new clients a schedule of possible additional charges along with the agreement before the facility has gone live.
Examples of the OTT quotes include:-
The Arrangement Fee –
A very common one-off admin fee to cover the costs associated with arranging the loan. Many companies are caught off-guard by the arrangement fee as it is often not presented upfront in the quote.
The amount varies and can be substantial: anywhere from 1% to 10% of the total quote. Payment is required at the start of the contract.
I have never come across any company that has been quoted 10% as an arrangement fee as to be honest the amount is just ridiculous. Most factoring companies charge a fairly nominal amount, typically £500 or so to cover the cost of documentation.
The take-on fee
A one-off service charge for recovering payment owed to your company from outstanding customer invoices. When work has been invoiced but payment has not been received, financial assistance in the form of invoice finance can be considered – at a price.
This take-on fee covers the loan provider’s costs associated with providing you with the amount owed to you, allowing your business to run as usual, and assuming responsibility for the unpaid invoice.
How much does it cost?
Typically 2% of the total value of invoices. The larger the invoices, existing or new, the larger the fee.
With the exception of much larger invoice facilities it is fairly common knowledge that most factoring or invoice discounting clients will pay two charges. A service fee based on the invoices factored and interest on the funds advanced. These fees will be the first thing that most potential clients will ask about and will generally be confirmed by the factoring company in a written quote prior to being included in the Agreement so to say that they are hidden is rather laughable.
Charge per invoice schedule (or charge to fund same day invoices)
What is it?
This fee is generally considered the most unwarranted of the lot. Simply put, it is the cost your company will pay to a financial institution when funds are paid on the same day the invoice is processed. This service is more often than not presented as part of the deal, without making mention of any penalty fees.
How much does it cost?
At a cost of 1% of the total invoice amount per transaction, this lack of disclosure is, in our view, dishonest business practice.
Nucleus may claim this to be the “most unwarranted of the lot” but again they aren’t presenting a true picture. Most factoring companies operate on the basis that funds will be available 24 hours after the invoices have been received in order to give them time to carry out their normal checks and due diligence etc but they will occasionally allow their client to draw funds early but this will incur a fee. Speaking as an ex operations type I am well aware that clients that want their payments prematurely cause a great deal of disruption to the daily work flow and the practice is therefore deliberately discouraged.
The final page of the E Book contained an alleged case study supposedly showing how one of their clients had been the victim of alleged hidden fees but unfortunately the Case Study doesn’t have the ring of truth about it.
One of our clients is a printing firm who, before they started working with us, had been granted a funding line of £200,000 with a discount fee of 1.5% above the base rate (0.5%).
• The money was to help them grow after winning a large new client.
• They thought their fees would total £75,000 over three years.
Their loan facility contained several hidden fees:
Arrangement fee – 5%
Survey/audit fee – £500 every 3 months
Trust account charge – 0.2% of paid invoices
Take/on fee – 2% of invoice value
They paid £10,000 as an arrangement fee and £4,000 as a take-on fee for invoices they brought on board
Every quarter they paid £500, adding up to £6,000 over the three years
They paid £2,550 for using the trust account their invoices were collected through
The true cost of the loan was £97,550 – a massive 30% increase on what they thought they would be paying!
As I have already mentioned the case study doesn’t have the ring of truth about it as firstly they were allegedly looking at the cost over three years which is highly unusual but makes for a larger figure in the case study and secondly all of the costs and fees that they are complaining about will have been outlined in the original Offer Letter as well as the Agreement that the directors signed.
I do wish that companies such as Nucleus, Simplicity and MarketInvoice would promote their themselves by outlining what they have to offer and not by publishing half truths about what their competitors are allegedly doing and if I may finish by offering some advice to Nucleus on the wording of their emails I would suggest as someone who has been in the invoice finance industry since before the sender of the email was born that you look at the wording of future communications more carefully as I doubt whether I am the only grey haired broker who doesn’t like being patronised.
EDIT – A couple of interesting facts came to light after I published this blog post thanks to my ever helpful readers and they can be found in the comments section