For 2010, this trend looks set to continue for a while at least, although improvements in credit cover availability are filtering through, which should improve matters for international factoring and possible interest rate rises may reduce spreads a little.

But as any economics or management undergraduate will tell you, apart from the obvious impact on general commerce, a crisis also usually comes with unfolding pockets of opportunity as industry and business dynamics are altered by the economic environment.

For factors, the opportunity could be in providing supply chain finance, particularly to mid -sized corporates.  Prior to the crisis, supply chain finance was a service that banks were trying hard to sell to large corporates with the promise of better cash flow and processing efficiency for both the corporate and their suppliers. Although these large corporates showed interest in the idea, there was not the take-up that was initially expected.

However, since the crisis, the positions seem to have been reversed. With large and medium sized companies having to pay much more attention to their cash flow positions and traditional funding routes more restricted, corporates are turning to supply chain finance with real enthusiasm. In fact, such is the call for supply chain finance that one trade finance banker said recently that he expected demand to soon outstrip supply.

A factor’s expertise is in managing and financing receivables and since receivables finance is usually at the core of most supply chain finance operations, factors are in a unique position to take advantage of the rapid growth in demand.

In fact, in certain markets like Spain and Italy, factors are already operating supply chain finance. Only in these countries it is known as reverse factoring.

To offer these reverse factoring operations along with distribution finance – in order to provide finance along different links in the chain – and extend them to other factoring markets seems a potentially substantial new business opportunity for factors. This particularly applies to the mid-corporate sector where the factor’s parent banks have not quite such a relationship hold.

The challenge for factors is in how to draw on existing expertise and transpose this into a linked service across more than one part of the supply chain and at the same time investigate opportunities in other markets beyond those already offering reverse factoring. Factors may also need to think about new routes to market and to perhaps target larger corporates than have previously constituted typical factoring clients.

Article contributed by Michael Bickers – www.factorscan.com

Image copyright: Flickr

Chaired by Professor Nigel Waite, head of the Financial Services Research Forum, the ‘Evolution of Alternative Finance’ think tank drew together industry representatives including the Asset Based Finance Association (ABFA), KPMG, the Federation of Small Businesses (FSB), the South East Economic Development Association (SEEDA), a successful retail business as well as relevant media and research bodies.

The impetus for the discussion stemmed from the widespread industry consensus that the Invoice and Asset Based Lending industry is at a watershed moment in its history. The closure of conventional forms of funding bought about by the banking crisis has injected a previously ‘niche’ form of finance with a greater degree of urgency and relevance to the UK business community – Venture’s own recent research found that 60 per cent of accountants reported clients are being more proactive in investigating alternative forms of funding.

Following the wide-ranging and lively discussions, the contributors found that for too long, ABL has been perceived as an alternative form of funding. If the lessons of the last decade are to be learnt and those preconceptions overcome, the attendees identified a need to educate government, introducers and end users to the benefits of a more ‘common sense’ approach to lending, giving particular emphasis to the higher level of service that is at the heart of the ABL approach. 

The report, which has been endorsed by Kate Sharp, Chief Executive of ABFA, concludes with some key areas for action, including an industry-wide effort to abandon references to itself as being ‘alternative’. The white paper outlines the need to – and benefits of – emphasising service as a key advantage over some aspects of the traditional banking offering, greater investment in education and promotion, and a simplification of the terminology which is so often cited as a barrier to entry.

Peter Ewen, Managing Director, Venture Finance comments: “At this important time for our industry, and in Venture’s 20th year of operation, we wanted to ignite a debate with key opinion formers. The conclusions reached should be of interest to key industry players and the wider advisory community alike.

“UK businesses are relying more heavily than ever before on strong relationships with their financiers – crucial to achieving stability and emerging from the recession in a position of strength. Greater numbers are also moving away from traditional sources to more robust and responsive funding methods. Invoice and Asset Based Lending offers both the quantum and certainty of funding to facilitate restructuring, growth and even acquisition.”

Those interested in receiving a copy of the white paper, entitled The Evolution of Invoice and Asset Based Lending, can contact Midnight Communication 01273 666 200 or download the report at www.venture-finance.co.uk/ABLwhitepaper.

Research commissioned by premier Invoice and Asset Based Lender (ABL), Venture Finance, has revealed that the number of business clients being refused finance by traditional lenders this year has almost tripled.

The study of 1000 UK accountants has found the credit restrictions driving that escalation is in turn stimulating renewed interest in alternative forms of funding solutions such as ABL.

Venture’s previous research in 2008 showed less than a fifth of accountants’ clients had been refused credit from traditional sources such as banks. However, in just 12 months, spurred by current recessive conditions this figure has rocketed to nearly two thirds (58 per cent).

The study charts the continued growth of ABL since 2007 and supports the Asset Based Finance Association (ABFA) 2008 survey, which found that 64 per cent of the financial industry saw ABL as a ‘mature product, having proven its worth in the market’.  The service is now second only to Venture Capital investment as other forms of funding have dried up or fallen victim to their own recessive contraction (such as bank loans or family hand-outs).

Other key findings from the research include:

• Businesses in the North East are suffering the most with a reported 73 per cent of accountants’ clients having been refused credit this year, compared to 48 per cent in the South East
• Amongst the accountants surveyed, the recruitment industry (24 per cent) is seen to be suffering the most from financial difficulty, followed by construction/property (23 per cent). Retail services are perceived to be the most stable
• Seventy-one per cent of accountants have seen an increase in clients suffering with bad debt, with over two thirds (70 per cent), believing services such as Bad Debt Protection are more important for business today than a year ago

Peter Ewen, Managing Director, Venture Finance, comments: “Our research lifts the lid on the state of British business in these challenging times. The significant rise in companies suffering bad debt, combined with restricted access to finance, has encouraged others to take out Bad Debt Protection for peace of mind.

“But it’s not all doom and gloom – whilst the rise in credit refusal by traditional lenders may suggest the business world has come to a complete halt, of course it hasn’t – business owners are just getting smarter and proactively reviewing their options.  As the UK economic slowdown continues,  it’s reassuring to see that nearly two thirds of business owners are responding proactively by seeking robust and responsive alternative sources of funding like Invoice and Asset Based Lending – however it surprises me the Government isn’t doing more to highlight this option to businesses both big and small.”

Peter Ewen – Managing Director, Venture Finance

Venture Finance – A premier independent Invoice Finance and Asset Based Lender with 20 years’ experience helping thousands of businesses.

Close Brothers Corporate Finance Holdings Ltd (www.cbcf.com) offers independent corporate finance advice in: Mergers and Acquisitions, Restructuring, Debt Advisory, Financial Sponsors Coverage, Pensions Advisory and IPO Advisory. Headquartered in London, it employs over 200 professionals across offices in Manchester, Paris, Lyon, Madrid, Barcelona, Frankfurt and Zurich.

Close Brothers Corporate Finance, one of Europe’s leading advisers with operations in the UK, France, Spain, Germany and Switzerland, will be a stand alone business working in alliance with Daiwa SMBC’s other international corporate finance operations and will continue to provide independent corporate finance advice. Close Brothers Corporate Finance will continue to trade under its existing name for up to twelve months. 

Close Brothers Corporate Finance will bring scale and authority to Daiwa SMBC’s international corporate finance advisory business, providing it with access and insight into European markets. The acquisition is in line with Daiwa SMBC Europe’s commitment to grow its presence across its four divisions (Investment Banking, Equity, Fixed Income and Derivatives) and to provide clients with market leading services.

Close Brothers Corporate Finance will benefit from access to a global network of relationships in Daiwa SMBC’s existing markets. This includes Japan, Asia (China, Hong Kong, Singapore, India and other countries), Russia, Bahrain, Dubai and other Gulf territories as well as into the US through Daiwa SMBC’s alliance partner, Sagent Advisors. Close Brothers Corporate Finance’s extensive presence across Europe, in conjunction with Daiwa SMBC’s established operations in Japan, Asia and the US, will facilitate cross-border deals.

Commenting on the acquisition, Mr. Eishu Kosuge, Chairman and Chief Executive Officer of Daiwa SMBC Europe, said: 

“This is an important acquisition for the firm and a significant day in our forty-five year European history. Acquiring Close Brothers Corporate Finance provides the firm with a stand alone European corporate finance advisory business thereby achieving one of our current strategic goals. Close Brothers Corporate Finance will also increase the firm’s locally originated European business and revenues as well as serving to diversify our earning streams which, to date, have largely been commission driven. I very much look forward to working with our new colleagues.”

Stephen Aulsebrook will remain Chief Executive of Close Brothers Corporate Finance, reporting to Mr. Ikuo Mori who becomes Chairman of Close Brothers Corporate Finance on completion of the deal. Mr. Mori was previously Senior Managing Director and head of International Operations at Daiwa SMBC and Director of Daiwa Securities Group Inc.

Mr. Mori, Chairman Designate of Close Brothers Corporate Finance, commented:

“I am delighted to accept the position of Chairman and look forward to working closely with Stephen. He and his team have built a successful and highly regarded European corporate finance advisory house and this acquisition positions us well to benefit from the increased cross border deal flow we expect to see between Europe, Japan and Asia.”

Stephen Aulsebrook, Chief Executive of Close Brothers Corporate Finance, said:

“Close Brothers Corporate Finance is experiencing a period of significant growth across Europe as a result of our proven expertise in handling complex situations in debt restructuring and M&A.  I am delighted that Daiwa SMBC Europe recognises the value of Close Brothers Corporate Finance and has clear plans to invest in the continued expansion of the business across Europe, as well as maintaining our independent advisory business model.”

For more information please contact:

Close Brothers Corporate Finance – Justin Clark  +44(0) 20 7655 3784

Daiwa Securities SMBC Europe Limited – Paul Lyon  +44(0) 20 7597 8109 

Citigate Dewe Rogerson
Grant Ringshaw     +44 (0) 20 7282 2851
Alistair Kellie         +44 (0) 20 7282 2850
Georgiana Varey   +44 (0) 20 7282 2806

Daiwa Securities SMBC Europe Limited (www.Daiwasmbc.co.uk) is the European subsidiary of Daiwa Securities SMBC Co. Ltd. The firm can trace its origins back to 1964 when Daiwa Securities opened its first representative office in London. It has branch offices in Paris, Frankfurt, Geneva, Milan, Bahrain and Dubai and a representative office in Moscow, operating across fours divisions – Equity, Fixed Income, Investment Banking and Derivatives.

Daiwa Securities SMBC Co. Ltd. is the Tokyo-based parent of Daiwa Securities SMBC Europe Limited. It provides brokerage and investment banking services, including M&A advisory services, targeting domestic and overseas institutions for their optimum asset management. It was formed in 1999 through a strategic joint venture between Daiwa Securities Group Inc. (60% owned) and Sumitomo Mitsui Financial Group (SMFG), Inc. (40% owned). The major strength of the firm is this unique business model, being the only dedicated wholesale securities company in Japan formed through a joint venture between a major securities company and a megabank. Daiwa Securities SMBC Co. Ltd. is able to develop its business by drawing on the broad customer bases of both Daiwa Securities Group and SMFG.

Sagent Advisors Inc. (www.sagentadvisors.com) is an independent, privately owned investment bank that provides its clients with financial advisory services and strategic alternative capital markets solutions. The firm serves a broad client base through its offices in New York, Chicago, Charlotte and San Francisco.  Sagent Advisors has no lending, trading, research or other structural conflicts – acting only as a trusted advisor to its clients.  Daiwa Securities Group Inc. holds approximately a 20% equity stake in the firm.

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/

Has ABL become more or less popular in the current downturn?

Morrison – The ABL market is growing as banks are more reluctant to do balance sheet lending during the downturn. This is especially prevalent in the small and middle markets (those with funding less than $20million)

Tannousis – ABL has become increasingly popular in the current downturn.

Are European markets that have not traditionally offered ABL funding showing increasing interest in the facility?

Tannousis – Yes there is increasing interest within EU markets that have not traditionally offered ABL to do so now.

How far into Europe has this development reached and are emerging European markets expressing interest?

Tannousis – ABL is now practiced in most EU countries, while there is increasing interest and upward trend in uptake in Europe’s emerging markets.

How have ABL facilities performed in the downturn? And specifically in the western United States?

Morrison – Non-performing loans have risen as companies struggle with poor sales and earnings.

How have ABL facilities performed in the downturn? And specifically in Cyprus?

Tannousis – Throughout this crisis the banks have been putting more pressure on their customers to repay debts. If clients face difficulties in meeting their debt obligations, then in some instances banks have proposed solutions such as ABL (Invoice Finance, Real Estate Finance, Leasing) to resolve their funding short-falls. Once customers are introduced to these products and find that they solve their liquidity problems, the chances are that they will continue to use such ABL facilities.

Cypriot banks have been only very lightly affected by the world crisis, having not invested in so-called toxic products at the heart of the downturn. Moreover, Cypriot banks were not lending below sub-prime, overestimating their assets or lending to customers with bad credit histories.

What is expected to affect Cypriot economy is the decrease in real estate demand, as expatriate spending is hit by the downturn. Cyprus is also expecting to be hit by a decline in tourism, as holidaymakers in the UK, France and Germany opt to tighten their belts.

Has ABL lending been affected by falling real estate values and declining demand?

Morrison – The only affect we see is that real estate relates to guarantees and side collateral that are used to support some loans. The decline in real estate values as side collateral has had a negative impact on availability in some cases.

Tannousis – In cases were there is falling real estate values and real estate provides the basis of Asset Finance, we have witnessed some decrease in demand, but nothing dramatic.

Have invoice finance companies that have traditionally focused upon factoring expressed increasing interest in the potential of ABL?

Tannousis – Invoice finance companies that have traditionally focused on factoring are showing increasing interest in the potential of ABL. In some instances all ABL activities are grouped under the umbrella of asset finance.

Morrison – Factoring and invoice finance companies are not actively expanding into the ABL market.

Is Societe Generale looking to expand its ABL offering?

Tannousis – It is under consideration.

Is First Capital looking to expand its ABL offering?

Morrison – Yes, but selectively.

Can ABL facilities be operated alongside traditional factoring services and how does such a synergy function?

Morrison – Yes. This is a growing market. A full notification factoring company can support any ABL lending by providing complete back office accounts receivables management, collections and credit protection. These products will enhance the value of the portfolio.

Tannousis – ABL facilities can function alongside traditional factoring services. One of the most important criteria for granting credit to a customer is a credit evaluation of the client. Once you have this then is easy to built upon the products offered to your client since you have a more complete picture. Also the experience of dealing with a customer is valuable in providing an impression of the client and how good their payment trends are. In this way you can also assess which ABL products will best suit the clients’ needs.

Contributed by: Factorscan www.factorscan.co.uk

During 2008, the sector far exceeded expectations, and at the end of the year was advancing in excess of £17 billion to UK businesses.

End of year results from the ABFA show that the industry is worth £208,014 million, a growth of nine per cent on last year’s figure of £191,401 million. This form of finance, which allows companies to release liquidity tied up in assets, has undergone rapid growth recently and is growing faster than general lending.

While the majority of advances are against debt, such as sales invoices – the latest figures highlight that advances against stock are on the rise. Over £1,603 million, an increase of 168 per cent on 2007’s, was advanced to companies during 2008.

The falling pound also continues to effect UK businesses. The use of export invoice discounting jumped by 34 per cent during 2008 indicating that more businesses are looking overseas in order to find new contracts, perhaps in an effort to move away from the slowdown in the UK.

Kate Sharp, chief executive officer at the ABFA, said: “It is no surprise that as a result of the tightening credit market, more and more companies are using their assets to their advantage. Despite limited liquidity elsewhere, the asset based finance industry has proven its resilience and has shown that it can continue to grow in tough economic conditions. More importantly, our members have given UK companies who have experienced tightening lending conditions a lifeline.”
The sector split for clients using asset based finance is evenly split between manufacturing and services indicating its broad appeal to the business community.

Contributed by Factorscan
www.factorscan.com

We have certainly seen more instances where Private Equity has used an ABL facility to provide funding when making an acquisition, as opposed to the more traditional forms of finance. This in itself was a learning process for both sectors but a relationship that I am sure will blossom over the next five years. 

Where we have seen a change in the marketplace, is that we, as the valuer, are being approached directly by the sponsor to provide the professional advice and valuations prior to going to the ABL marketplace. That’s where our knowledge and experience as Asset Based lenders, along with a strong history of asset valuations, assists the process. The more detailed knowledge and information about the assets we can give the sponsor, the smoother the process of structuring the facility is at the outset. 

By its very nature, an ABL will be a lot closer to the assets against which it has provided funding because they’re receiving daily or weekly information in respect of the performance of the assets, along with the financial performance of the company. This is, and should always be, supported by formal valuations on a regular basis, as the asset values can increase and decrease very quickly. In the last 12 months, the market has seen how much fixed asset values have slipped, primarily in the Plant & Machinery and Property sectors. 

Moving through 2009 and into 2010, mid–market companies will find traditional forms of finance more difficult to access, leading to a number of refinancing and acquisition opportunities. Private Equity will continue to play a pivotal role in this arena, leading to many new opportunities to work more closely with the Asset Based Lenders, now that they have a better understanding of how the offering works and is structured against the asset base. They will continue to be involved in acquisitions, which will involve a restructuring or reshaping of a business, and because of the revolving nature of an ABL facility, it’s a perfect match.

Edward Symmons has been providing financial institutions with asset valuations for over 60 years and, specifically, the Collateral Review and Valuation team provides valuations to the secured lender, including those in ABL and Private Equity markets to support the credit and risk management process.  Gary Quaife can be contacted on 020 7955 8454.

www.edwardsymmons.com

This is because increased volumes do not necessarily mean increased profit – well not in a recession anyway. According to Michael Bickers, author of the recently published 12^th edition of Factoring in the UK and editor of the World Factoring Yearbook*, ‘during the last economic downturn in the early 90s, factors experienced a surge in business, but profits, for many, went into decline. This was because, although the level of business and enquiries was higher, the credit quality of clients and their customers – who owed money to the factors – decreased significantly, causing factors problems in collecting debt. In addition to this, client fraud levels shot up – and fraud is the factors worst enemy, sometimes wiping millions off the bottom line’.

Factors are now facing a similar situation in the current climate. However, they have the added problem of severely restricted credit insurance cover, making it much more difficult to offer non-recourse facilities. Some factors are also experiencing liquidity problems.

Bickers, however, believes that there may be ways that factors can avoid these problems and trade much more effectively in difficult times, such as ‘identifying key triggers for high risk scenarios, positive pricing strategies, working more closely with credit insurers and evaluating potential new markets’.

These, along with other issues designed to help factors retain and increase business, will be discussed in-depth at BCR Publishing’s forthcoming Receivables Finance International conference in London in March.**

For factors and other counter cyclical industries these could be good times, but as in most turbulent environments, one has to tread carefully – after all, as every farmer knows, hay can burn very easily.

However, if factors get it right and with a little help from parent banks and central banks, factoring and other receivables finance products such as invoice discounting, asset based lending and supply chain finance, as alternatives to more traditional forms of lending could be seen as a far more appropriate forms of funding now. As a short-term asset of perhaps 50 or 60 days, a receivable has none of the difficulties for financiers of having to assess longer-term asset valuation. And there is no real need for a factor’s client to have any strength in its balance sheet, as the focus is on the strength of the client’s debtor. If the factor’s client has a reasonable spread of debtors in the sales ledger, risk can be relatively easily managed.

Banks, including central banks, need to look at this class of funding more closely, particularly in view of what’s happened in recent months. Indeed, even in the last downturn, the Bank of England said there was an over reliance on the bank overdraft and that alternative forms of funding, such as factoring, should be considered. Since then, factoring in the UK and in most other parts of the developed world has grown enormously – in the UK it is estimated to have reached over £200bn in volume in 2008. Despite these large figures, it is thought that only about 5% of trade receivables are financed externally (SCF Capital, 2008), suggesting that receivables finance is still very much under utilised.

As such, if factors and trade receivables financiers can get to grips with some of the issues that are currently hindering growth, they could continue to move towards what could be a very bright future.

*Factoring in the UK, 12^th edition, £475; World Factoring Yearbook 2009, £140, published by BCR Publishing: Tel: 020 8466 6987

** BCR Publishing’s 9^th Receivables Finance International, factoring conference and exhibition, London Intercontinental Hotel, 19-20 March, Tel: 020 8466 6987, www.factorscan.com