Factoring Blog review of the first half of 2009 part two

Factoring charges in the past have been driven down and down as one or two of the major bank owned factors have tried to buy market share at any cost. The activities of an internet lead generator with an automated online pricing model hasn’t helped as any such thing must be price driven thus driving prices down even further and the factors have tried to redress this by looking at other ways of increasing revenue rather than affect their headline rates. To this end we have seen the introduction of facility commissions which is a percentage of the agreed facility and is addition to the factoring commission. At least one of the big bank owned factors is now incorporating renewal commissions too if the poor client wishes to renew his facility at the end of the year whilst the worst one of the lot has been sneaked in by one of the big boys who has stuck in a termination fee which becomes payable if the client wishes to terminate his facility whatever the reason whatever the time.

Wageroller and Smart Flow Finance have bitten the dust although there are rumours that Wageroller has resurfaced under a new name but the only factoring company to have succumbed in the first quarter of the year has been Challenge Finance.

I started off the year by announcing that GMAC had pulled down the shutters for new business but I had a meeting with one of their regional directors yesterday who told me that they were now in full steam ahead mode and with quite an innovative range of ABL products too.

Even in a fast changing world like the one we currently live in there are some things that never change. At the end of last year I announced that the parent company of Cattles Invoice Finance were about to sell the company and that would happen “any day now”. Six months down the line the supposed sale of this factoring company is still just round the corner as the parent gets further and further into the mire with it’s negotiatons with bankers unresolved, it’s accounts delayed as the auditors won’t sign them off and the shares suspended. Still I’m sure that a Cattles insider will be contacting me shortly to let me know that the sale will be happening “any day now” as has been happening at monthly intervals throughout 2009 so far. 🙂

The other enigma is Close Invoice Finance which at one time was a market leader in terms of client satisfaction but where the stories of ill treatment from unhappy clients just seem to keep on coming. This year to add to the confusion Close have closed the operating centres in Birmingham making a number of redundancies in the process in order to cut costs whilst at the same time employing an industry heavyweight on what must be a huge financial package to run the Northern operation, as well as buying a small factoring operation in Northern Ireland.

My predictions for the second half of 2009 are to expect much of the same. The market will still be tough to operate with the well run independents riding out the storm without too much damage to either their reputation or bottom line but I think that the recession coupled with the tough attitude taken by the credit insurance market will start to see big problems in the top end of the invoice discounting sector with companies turning over in excess of £50m failing and possibly resulting in significant bad debt losses for the banks operating those facilities.

Time will tell.


Factoring charges – the hidden costs

The factoring market has long been very competitive but when prospective factoring clients compare quotes from a number of different providers they often just look at the headline rates without bothering to delve any further into the small print.

We came across a company recently who banked with RBS and had naturally approached RBS Invoice Finance for a factoring quote. According to the prospect the quote for factoring the debts of this £300,000 pa turnover company was “a little on the high side” but it wasn’t until they emailed the quote over that I realised quite how high it was as it included a setup charge of £1,500 which is three or four times the size that most of the independents would charge but the real sting in the tail was the 1% renewal fee which I must admit was a new one on me.

Asking around it seems that RBS Invoice Finance wasn’t the only factoring company to charge renewal fees as HBOS also used to do it.

I was discussing a quote for an invoice discounting facility with a provider today and I asked him whether he had quoted a renewal fee and his reply was that his company didn’t charge them whereupon I suggested that he should have put renewal fee – none in his quote as we know that we are tendering against a couple of bank owned factoring companies who may well have renewal fees.

Whilst discussing renewal fees the factor told me that he had seen a quote from RBS Invoice Finance that included a termination fee. This wasn’t a fee in lieu of notice for an early termination but would have been payable on top of the balance of any minimum fees whenever the client decided that he no longer needed his facility.

It’s getting to be a bit of a minefield out there.

RBS announce £3bn extra funding for SMEs

It was announced today that RBS would be making available an extra £3b in the SME sector and the press release even mentioned that this would partly be used in their invoice funding division.

Judging by recent activity it would seem that rather than tell the world that their factoring and invoice discounting divisions are not interested in new business they are continuing to quote but at such uncompetitive rates that no-one in their right minds would take up their offer.

Just this morning we had an enquiry from a well established firm of recruitment consultants turning over £1.7m and with a healthy balance sheet who were looking at invoice finance not because they desperately needed the money but to be prepared for the inevitable hiccups in their cash flow. Their outstanding debts were £300,000 and they were looking to raise a maximum of £100,000 as a stand by facility.

We approached one of the independent factoring companies known for both the excellence of their service as well as competitive pricing and they quoted a rate of 0.45% with a minimum of £6,000 for a confidential invoice discounting facility whilst the company approached RBS Invoice Finance directly as they banked with RBS who quoted them exactly double.

HSBC increase their factoring charges due to Basel 11 ?

I heard last week that the factoring division of HSBC had increased the interest charge to one of their recruitment company clients from 1.5% over Base to 3.5% over Base and had also increased the factoring service charge. They stated that the reason for this was down to Basel 11

In the same week I read an article in The Times that said “History, of a sort, was made this week when HSBC declared that, from next month, it will be offering its “lowest mortgage rate ever” – a super-cheap 2.99 per cent deal”

Something doesn’t quite add up here

Factoring company interest rates

Factoring companies have historically charged interest at a percentage over Base Rate ( say 2.5% to 3%) but have built in to the Agreement a minimum Base Rate of, say 4% so their current lending rate of 7% per annum is effectively 5.5% over Base

In the light of the recent reduction of Base Rate to levels previously unimagined many factoring companies have switched their interest charging structure to a percentage over Libor so that they can maintain their margin on lending but we were talking to one of the independent factoring companies that we deal with who informed us that they do not have any minimum built into their agreement and their current lending rate is between 4% and 4.5% per annum.

The irony of this is that their factoring interest rate is now considerably cheaper than that charged by the bank that funds them