Broker Opportunities in Asset Based Lending and Invoice Discounting
by Colin Bruce, Head of Invoice Finance
Niche Commercial, February 2004
A unique situation has recently arisen offering an excellent opportunity for commercial finance brokers to provide a service to existing clients in the form of Invoice Discounting and Asset Based Lending (ABL):
Reason 1: Basel 2
The clearing banks have started gearing up to meet banking codes of conduct as set out in Basel 2, most notably the level of reserves any bank must hold to backstop any unsecured lending. The result is that banks are now beginning to proactively drive down the levels of overdraft facilities extended to businesses.
Broker Opportunity
Your clients will likely be pushed into either a factoring or invoice discounting facility in order to meet the banks requirements. Frequently the banks present this as obligatory to the business owner, sometimes neglecting to mention that there are independent factors and discounters in the market.
Some banks can also price these facilities at levels much higher than the overdraft and the market rate. In addition, many independent discounters offer higher levels of service through industry specific understanding. Your guidance can be invaluable to your client and a bank may be more likely to release a debenture if a third party advisor is involved.
Reason 2: Brumark
For years banks were able to lend to businesses safe in the assumption that if things went wrong they were preferentially entitled to collect their debts from the debt ledger of the failing company. Not any more. While not having been fully tested in this country yet, the recent Brumark ruling in New Zealand means banks must join the queue of creditors like everyone else.
As a result banks now seek to take legal ownership of the book debts. In addition, any credit extended to a business owner secured with a personal asset is far more likely to result in the bank now chasing that asset.
Broker Opportunity
When overdraft levels begin to get high as a percentage of turnover, many bank managers will be more likely than in the past to refuse further credit to a business and refer them to the bank's discounting unit. The trouble with this can be the discounting division, due to stricter underwriting criteria and failure to recognise the validity of some debts, will offer a lower level of funds than an overdraft, e.g. <50% of the outstanding ledger. This is an excellent opportunity for a broker to get involved and guide the client to an appropriate discounter who offers better per invoice advance rates and better entire ledger advances. If the client receives 70% of the ledger you will have provided a real value added service and, most likely, helped secure the future of the company.
Reason 3: Enterprise Act
"Agents of the Crown" (e.g. Inland Revenue, Customs and Excise) now have the same rights as other creditors. Such agencies are expected to be more proactive in collecting and are less likely to be open to appeals for extended time to pay crown arrears.
Broker Opportunity
Clients with large Crown arrears may need special help in structuring a finance package which allows them to dig themselves out of the financial difficulties they have found themselves in. One route to paying off crown arrears is by leveraging tied book debts to raise extra capital. But frequently that may not be enough. Banks may be more reluctant to extend facilities beyond conservative ledger funding rates.
By introducing your client to the right discounter or asset backed lender, extended credit facilities can be secured based on not just the sales ledger but other assets such as stock, equipment and property. As free cash flow is generated, the security over some of these assets can be removed over time as the level of funding required reduces.
In addition to the situations outlined above, the uses of ABL can be extensive for your clients. Too many companies allow assets to sit on their balance sheets unlevraged while at the same time struggling to fund their growth. ABL lines can be very fast and flexible to secure while offering far higher levels of leverage to a commercial lending strategy.
Of the major UK clearing banks only Lloyds TSB Commercial Finance offers a comprehensive ABL service. However many independent discounters have added this flexibility to their product line including GE Capital, GMAC, ABN Amro-owned Venture Finance, and Bank of Ireland-owned Enterprise Finance. None (Except Lloyds TSB) have branch networks. As a result they work closely with introducers and brokers.
The ABL model has been very successful in the US. In the UKthe outlook for such lenders appears very bright and the opportunities for brokers to help their clients to create a better and more useful ABL or invoice discounting funding structure is enormous.