Each month UK invoice finance brokers generate lots of prospective customers in industry sectors that are poorly served by our industry. For example in the first quarter of 2007, over 150 construction companies with an average turnover in excess of £1 million per annum came to Xbridge’s Simply Business brokerage seeking invoice finance. Unfortunately, only one UK lender has enough construction industry expertise to effectively handle such prospective customers.
Recent changes to HMRC’s Construction Industry Scheme (CIS) make it even tougher to underwrite invoice finance facilities in this sector. Forward thinking factors should view these changes as an opportunity to develop an industry niche and take business away from those more complacent.
Until recently, construction companies operated under a CIS 4, 5 or 6 certification: granted by HMRC depending upon their individual track records. This certification determines the rate of tax they must deduct (or not) from payments to sub-contractors, as well as the corresponding percentage of funds a factor is prepared advance on an invoice. The most significant change in the new CIS scheme is HMRC’s ability to change the certification status (i.e. whether an invoice is paid gross or net of tax) during the course of a company’s relationship with a subcontractor as a penalty for late payment by the subcontractor.
Naturally, the potentially dynamic changes in certification status make the level of security in a subcontractors’ invoices more unpredictable – and harder to underwrite. The changes also hinder the efficient collection during insolvency.
In the past this issue could be mitigated by the ability of the factor or discounter holding a debenture, to instruct an insolvency practitioner to collect payments. Under the new changes insolvency practitioners no longer have a special status to obtain payments without deduction and are subject to the payment status of the subcontractor prior to failure.
Although the new CIS scheme presents challenges, the increased complexity should be viewed as an opportunity for agile funders willing to develop specialist industry expertise. Such lenders will enjoy a highly favourable competitive environment. Brokers such as Simply Business, Factoring UK and Hilton-Baird will jump at working with such specialists and provide plenty of new business.
For clever lenders, the CIS changes are an opportunity to capture market share in an important and rapidly growing industry sector. Construction is just one industry sector where specialisation makes sense. As a broker, we would like far more lenders to specialise in industries that are widely regarded as challenging.
Opportunities for innovatively underwriting exist in the telecoms, technology and in most service sectors. As discussed in my November column, lenders that today continue to focus on “vanilla” deals are missing important opportunities.
Whether you are an independent factor or a large bank, specialisation and competitive differentiation are key to maintaining healthy margins. Those who differentiate themselves from competitors and view the underwriting challenges in these industries as competitive opportunities will flourish.