David Coates, CEO of Davenham talks to Factorscan about how Davenham, a leading UK independent, is faring in the downturn; how price differentiation has failed to become the leading USP; and why the UK government should be lending its support to the factoring offering.

How is Davenham faring in the downturn?

Results have been mixed. Fifty per cent of our business is financing SMEs, which is a challenging environment within which to work, with many UK businesses suffering in the current environment. Our leasing and hire purchase business meanwhile has been performing well, with continuing interest and suitable clients in the market.

Our factoring operations have been affected by the state of the wider economy, and although there is a good flow of business, there are rising risks in the portfolio. Banks have turned away increasing numbers of clients; many of whom have found their way to our door; but the problem is that not all such clients are suitable, and if they are, they often in need of a significant amount of assistance. We are looking to do the right thing by UK business in the crisis, but it is difficult to take on new business under present circumstances.

How is Davenham coping with funding its operations?

We find ourselves in an enviable position financially. We have considerable reserves of capital, institutional investors and lines of credit from the banks to the tune of £215 million. This was all reconfirmed recently, and Davenham has both the appetite and money to provide funding to UK business.

What is the secret of Davenham’s continuing success?

We have been providing financial products for the last eighteen years, which has helped to provide us with a host of experiences. The company was formed during the last recession back in 1991, and since then we have developed a clear perception of the marketplace within which we operate. We are there to provide funding over and beyond that offered by the banks, and by tailoring our offering to the needs of this niche, we maintain a competitive edge in the market. Banks and their factoring offerings have become increasingly formulaic, and it is our ability to adapt to the ever-changing needs of SME customers that has enabled us to be as successful as we have been. SMEs are a bit special, they may need funding to pay for a buy-out, to develop or expand their business or for other expenses, and we are in a position to work with them to provide them with the tailored financing that they might not find if they turn to the banks.

Having been in factoring for as long as we have, we also have the necessary platforms and institutional discipline to build on our strengths and provide the best customer offering possible. A major part of this has been investing in the skills and development of our staff, which has allowed us to respond and adapt to the needs of the industry and the customer. By doing this we work to provide both our customers and our staff with what they want, which has been an essential element of our success.     

How have independents fared, compared with bank-associated factors?

It is difficult to tell. Independents largely live off their own means. What is clear, is that in a recession no one does as well as they would otherwise and factors, whether independent or not, need to be more wary.

Has pricing become increasingly important as a USP?

No. Davenham has maintained the price of its offering despite the downturn. We emphasise the service that we provide, rather than price differentiation, and under present circumstances – with rising client failure, default and fraud – this kind of emphasis has shown itself to be sensible. 

What is Davenham’s USP and has it developed in the downturn?

Davenham offers its customers a range of financing alternatives that sets it apart from many of the other factors. Davenham offers not only factoring and other forms of receivables finance, but also offers letters of credit, leasing and ABL funding products. It is in the differentiation of our offering that we find our USP.

Which industries has Davenham and others in the UK market found are increasingly untenable as clients?

The engineering and construction industries are probably the worst hit. Perishables and products sold on sale or return – which have always traditionally been avoided by the industry – have also become increasingly untenable. The number of factors and factorable goods have both risen in recent years, but in the current downturn factors are going back to basics and those industries that represent a level of stability in these difficult circumstances.

How far have levels of bad and doubtful debt risen?

Levels of bad debt are twice that of two years ago. There is a high level of debt in the cycle and this looks unlikely to change as long as the recession persists.

How has Davenham sought to strengthen its due diligence and risk assessments?

We have had to look more carefully at the quality of book debts and at that of our clients. If there is anything doubtful in the portfolio then we avoid getting involved. Difficulties now will only become problems in the future.

Is the government supporting factoring as a financial product?

There has been no government support as of yet, but this is the kind of initiative that is really needed to support the economy. Factors are in the perfect position to act as a conduit for much needed finance to UK SMEs, and we are able to react more quickly than the banks.

What are your expectations for the recession and the factoring situation in the UK?

The situation will remain pretty severe for most of this year. Major initiatives undertaken by the government and lenders should ease the situation somewhat, with things starting to get better at the end of 2009. But then again I am an optimist. And no you don’t want to ask about the worst-case scenario.

Contributed by Factorscan: http://www.factorscan.com/