In November, Land Securities and British Land, high street landlords to Blacks Leisure, backed the struggling retailer’s rescue plan by voting to accept a CVA. This corporate restructuring tool is not widely used, yet more than 97% of Blacks’ creditors agreed to the proposal, a move that prevented the leisure retail group from going into administration and saved thousands of jobs.

Industry experts say the arrangement will accelerate the group’s turnaround strategy, allowing it to close down 101 loss-making stores in order to focus on its core business.

In cases where a CVA is utilised, which requires approval by at least 75% of creditors, businesses burdened with debt can continue to trade and pay creditors a proportion of what is owed to them out of future profits. Typically, a business will pay a fixed monthly sum into the arrangement for a period of three to five years, monies that are subsequently distributed to creditors. This can be an attractive proposition for creditors if the alternative is liquidation, where they stand to receive virtually no recovery on their debts.

In certain circumstances whilst the proposal is being formulated, a moratorium can be put in place that prevents creditors from bringing proceedings against the insolvent company. A licensed insolvency practitioner will assist with the proposal and, once approved by creditors, will oversee its implementation.

CVAs have not been widely used since their introduction in 1986, and historically have had a high failure rate.  But last year a number of successful high profile cases, such as retailers JJB Sports and Discover Leisure have demonstrated that they offer a genuine alternative to the administration process.

CVAs offer a number of advantages over other formal processes: 

• They are flexible and can be tailored to the specific circumstances of the company
• They enable owner-managers to retain control of their businesses
• The business is able to emerge from the process intact
• They are transparent and inclusive
• Creditors can approve or reject the proposals, or put forward amendments.

The Government is currently considering legislative changes to the procedure to further encourage corporate rescue. These proposals include the expansion of the moratorium process and giving super-priority to lenders to promote the availability of rescue finance to companies in CVAs. 

In light of these changes, it is likely that CVAs will become more popular with troubled businesses of all types in the year ahead.

For more guidance on debt restructuring, contact Andrew Duncan at Bridge Business Recovery, an owner-managed firm specialising in business reviews, corporate restructuring, funding and insolvency, on 0207 025 6130.

It’s hardly surprising that the phenomenal growth in invoice finance for businesses of all sizes over the past ten to fifteen years has correlated with a simultaneous rise in the incidence of fraud against invoice finance companies.

As someone who has worked in the insolvency profession for over twenty years, I have seen varying degrees of this type of fraud – from the finance director who raises early invoices to ease cashflow, to the director who deliberately presents a bogus ledger as part of a longer term plan to run off into the sunset with an embezzled fortune.

In my experience those that do try to run don’t get very far but by the time they are caught there’s every possibility that they do a lot of damage to the position and security of the lender.

Although there are no reliable figures available, it is suggested that the receivables industry in the UK alone loses in excess of £50 million per annum in fraud related incidences.

However, despite the rise in this type of fraud, most directors act responsibly and honestly and have no intentions of defrauding others. But to play it safe, what can those who work in the invoice finance industry do to reduce the risk of being exposed to this kind of fraud?  Here are some tips on prevention.

Desperate times – Desperate measures

Companies trying to avoid insolvency will go to extreme lengths, including banking debtor receipts into the general bank account and producing misleading management accounts.  Often no accounts will be available, so insist on receiving current financial information, which should highlight any looming cash crisis.

Beware the habitual entertainer or high roller

Despite the lure of lavish lunches alarm bells should begin to sound when the company is a regular entertainer and host to very showy social events.  Whilst it’s fair to expect an element of this from those clients wishing to renegotiate better terms or, at year-ends, one should be mindful of those regularly splashing the cash.

The director who takes frequent holidays in the Caribbean or renews his Porsche every six months is an obvious candidate to watch out for.  It could just be that he or she is funding their extravagant lifestyle at your expense.

Everything going too well

Of course there are many successful companies but do not take it on face value; visit the company and insist on appointments being kept.

In order to minimise risks, be mindful of the following:

Opt for careful client selection

New business is not always good business and receivables financing is no different in this respect.

Due to the large level of funds advanced there is the definite need to conduct background searches into the past and present directorships of the prospective management, stakeholders and guarantors.  As always, the best advice is “know your client”.  Obtain copies of CV’s for those that work in the accounts department.  Also, do not discount the value of face-to-face meetings with the key stakeholders.

Regular and thorough audits

Use trained and qualified staff to carry out field visits to the company.  Do not allow appointments to be continually cancelled and by inference those clients that cause greatest concern should have the more frequent and thorough audits.

Be wary of possible collusion with a customer.  A detailed analysis should be carried out on the ledger, principally focusing on the main ten to fifteen customers.  It’s worth finding out if any of the customers are connected.

On completion of the audits ensure that the results are quickly communicated to the client in order that and subsequent actions can be implemented quickly where necessary.  If an audit result gives cause for concern it may be at this stage that the client manager will seek the advice of a third party, say, an investigative or forensic accountant to confound or alleviate any fears.

Monitor key financial indicators

Undoubtedly many invoice discounters operate sophisticated internal management systems to assess their clients’ financial wellbeing and highlight risk.  The most common of these indicators are as follows

• Unusual sales patterns
  A good example of this is where a client has a seasonal business.  It’s a good idea to ask the client questions if they suddenly start to notify you of an upturn in sales, out of season.
• Increasing turnover
  This is often the trademark of those clients generating ‘fresh air’ invoices, duplicating invoices and / or early notification of invoicing.  It is often the case that a company will notify the invoice discounter of an increase in turnover as it finds itself generating more bogus invoices in order to repay its debts and cover its tracks.
• Increasing debt turn
  A reduction in debtor days would indicate that the fraudster is trying to cover their tracks, often by paying ‘fresh air’ invoices with further ‘fresh air’ invoices.
• Increased number of credit notes Often those that generate fictitious invoices will subsequently raise credit notes in order to prevent the discounter from chasing the debt.
• Decreasing number of credit notes
  As opposed to those clients generating a sharp upturn in credit notes, those clients generating few or indeed no credit notes should equally concern invoice discounters.  Clients who do not produce debit notes, or do not notify the invoice discounter may be trying to deceive them in order to maximise their funding availability.

It is important for all businesses to tackle fraud.  Prevention and detection of fraud is key but in order to do this knowledge of the types of fraud that exist is necessary.  Fraud prevention should be proactive not just after a big loss when it is too late.  Recent research indicates that 50% of all trading companies were defrauded to some extent last year.

You have been warned! If you do need some assistance, please feel free to contact MCR who have recently recruited Graham Edwards and Victoria Butler to spearhead their forensic investigative work.

Article contributed by Paul Clark, Partner of MCR

Every business faces risks that could threaten its very survival. Risk doesn’t discriminate. It doesn’t matter what sector you operate in or what size your organisation is, whether you are doing well or not so well.

The only way to manage risk effectively is, to first of all, understand the risks your business faces and how you are able to mitigate them.  External risks can be financial, such as exchange rate fluctuations, or strategic, such as the loss of a major customer. Internal risks can be operational in the form of accounting controls or employee fraud.

Effective risk management means identifying the worst case scenarios, asking the ‘what if’ questions, and having a clear strategy to deal with these potential eventualities.  These could include:

• If the majority of the business’s turnover is sourced from one customer, then it’s time to consider expanding your customer base.
• If one employee alone is key to a particular function of the business, it’s time to invest in training and/or recruitment.

Having identified the risks and put a plan in place to take appropriate action, next consider minimising costs.  Monitoring of overheads should always be a priority during the good times and the bad. The key areas to consider are not only maximising returns on outgoings, but also reducing these through the potential outsourcing of overhead functions such as, marketing or human resources.

Production and selling costs should also be scrutinised, reducing stock levels, and simplifying supply chains can yield substantial savings.

However, targeted additional spending, for example in IT, if well planned, almost invariably increases efficiency.

Cash really is King in a recession.  Businesses managing cash and working capital effectively have the opportunity to make strategic acquisitions, or build turnover by supplying to the customers of failed competitors.  Even small businesses should prepare cash flow forecasts, to help them prepare for ‘pinch-points’, so a potential problem does not become a disaster. Have a clear credit control procedure and consider insurance against bad debts. And consider alternative sources of funding – in the wake of the banking crisis, this has become increasingly popular, particularly with traditional lenders retrenching for the moment. Products like factoring or invoice discounting, asset and inventory finance can help ease cash flow worries and are increasing in popularity.

Finally, don’t be afraid to ask advice. The fact that 5,483 businesses went into insolvency in the first quarter of 2009 (up 57% on the same period last year), shows not enough people are seeking professional advice at an early enough stage. Make sure you are not one of them come the next quarter.

Managing risk is about identifying what could go wrong, and developing strategies to deal with potential problems. It sounds simple, but in these troubled economic times, an effective risk management policy is vital, and could potentially be the difference between success and failure.

Andrew Duncan, partner with Bridge Business Recovery

Taken as a whole, 2009 has ushered in far more business closures than fresh starts. In recent weeks, however, two high-profile moves have put well-respected business builders in the enviable – if daunting – position of putting together a brand new asset finance business.

The first is Richard Briscoe, formerly of Arkle Finance, who at the time of writing had just walked into his new office, situated in the grounds of Castle Ashby, Northampton.

He is there to build a business under the banner of Close Asset Finance, which he will take to the market as Close Business Finance, a unit of the group’s overall lending operation.

The objective, says Briscoe, is to create something very much along the lines of Arkle precursor Weatherbys Finance, which he created from scratch in 2002. Essentially, this will mean a broker-led operation with a focus on ‘soft’ assets such as catering equipment and shop and office fittings, concentrating on ticket sizes between £5,000 (€5,500) and £50,000.

The strategic resources that the new business can draw on will be more extensive than those that were available to Briscoe when building Weatherbys – the Close Asset Finance group already runs a number of finance companies with gross receivables in excess of £800 million, and has been in the leasing business for 22 years.

Weatherbys was not his first experience with growing a business. In 1994, he began his career with independent lender Broadcastle, as assistant to the company’s chief executive.

According to Briscoe, this period of his career acted as a kind of apprenticeship in how to run and develop an asset finance company. He became head of underwriting during his eight-year tenure, and saw the business grow considerably. In fact, three years after his departure for Weatherbys, Broadcastle was bought by German manufacturer Siemens for £41.5 million.

Briscoe will bring more than experience to the new venture: some of the brokers that Close Business Finance will inherit as introducers have been trusted sources for business since his earliest days at Broadcastle.

Although he stresses that he will have his eye very much more on quality then on quantity of business, Briscoe anticipates lending £15 million-£18 million in CBF’s first year. In two years, he hopes to have doubled the amount being lent, and have around 12 staff in his office – but for now, he will have to make do with setting up the phone system.

Elsewhere in UK banking, George Ashworth has an awful lot of work on his plate – but he sounds more than happy with the prospect.

No small wonder – he has just moved from a senior international vendor services role within the troubled Belgo Dutch operation Fortis Lease, where he headed up international vendor business, to the position of head of asset finance at brand new bank Aldermore.

Aldermore, owned by private equity house AnaCap, plans to grow a flourishing asset finance and leasing business from the portfolio of pre-buyout incarnation Ruffler Bank, which specialised in financing coin-operated machines.

AnaCap bought Ruffler Bank earlier this year, and combined it with other acquisition Base Commercial Mortgages to create the new lender.

According to Ashworth, the direction that Aldermore will take is not set in stone: “Keeping our options open is important as there are plenty of opportunities”. That said, “the main objective for the asset finance business”, he stresses, “is to support the bank’s overall ambition to be the UK’s number one SME lender of choice”.

Ashworth advises that there will be a focus on funding ‘hard’, tangible assets of easily determinable value, with potential for longevity. He also hinted the funding model behind the successful Ruffler coin-op business might well be applied to other sectors.

Much like Briscoe’s new business, Aldermore will also be making good use of broker introductions as it gets running – it is already benefitting from AnaCap sibling Syscap, in which it has a sizeable equity stake, as a source of good quality IT business.

Beyond that, the bank’s distribution strategy, much like its asset focus, is undecided. Ashworth is weighing up the options, but feels that, for now at least, his immediate past experience of the vendor sector will be given a rest.

More immediately useful might be his experience as operations director for Lombard, a role he took on in 2000 before going on to head up the lessor’s sales and then business development functions.

Ashworth is not suggesting that Aldermore has growth ambitions on the scale of the RBS-owned colossus – like Briscoe, he underlines the importance of writing good rather than plentiful business – but he doesn’t deny that his past responsibilities have given him a good eye for putting together a robust model for volume lending.

First on the agenda is a new IT infrastructure. Phase I is due to be complete at the end of October, laying the foundations for Phase II to be prepared for Q2 next year. “Aldermore will then be well placed to handle a number of product offerings on a scalable basis.” says Ashworth.

People also feature prominently. Aldermore is looking to recruit a number of staff, with a new business development position in the North West and a credit risk function position currently under offer.

Ashworth is keen to recruit personnel with experience of every stage of the transactional process, since Aldermore’s business model is still evolving: “We are looking to recruit people incrementally who can add value both in our initial setting up phase and thereafter”, he says.

In any case, he says, by Christmas, the new asset finance unit will have a small but professional team in place, capable of writing business with the IT and business process infrastructure that has been completed by that point. Come Spring 2010, it looks as if Ashworth will be ready to begin lending in earnest.

Contributed by Fred Crawley – Reporter, Leasing Life & Motor Finance – Leasing Life

Image copyright: Flickr

Economists and politicians may talk positively about ‘green shoots of recovery’ but the latest analysis from PricewaterhouseCoopers (PwC) shows the downturn is showing ‘no signs of abating’ with 5,483 firms becoming insolvent in the first quarter of 2009, up 57% on the same period last year.

Businesses going into some form of insolvency are very much a reality of today’s Britain. And while Insolvency Practitioners are duty bound to realise the assets of a company and distribute them in accordance with the law, this still leaves unsecured creditors at the back of the queue, often receiving little or no recovery on their debts.

However, rather than sit waiting around for a meagre dividend from a liquidation process, there are positive steps you can advise your customers to take to protect themselves against bad debts.

Much will depend on the nature of the terms and conditions of trade: make sure these incorporate a robust retention of title clause and remember that they will always be easier to enforce if there is an explicit acknowledgement of them by the debtor. Any new customer should be required to sign and date a copy of the terms and conditions, before agreeing to do business with them and commence supplying goods or services. While a new customer can equal more profits for a firm, it can also spell disaster if they turn out to be a poor credit risk.

Companies should also consider what credit limit is realistic, and stick to it.  If they are dealing with a new or unknown customer, they should always get a report from a credit agency. Another approach is to request a deposit or even stage payments.  If there’s doubt about payment, they should consider obtaining a guarantee from a parent company, if applicable.

Other techniques include a requirement that contract funds be protected by use of a trust account. Additionally, it may be possible to negotiate step in rights, particularly if they’re a stakeholder in on a project involving sub-contractors.

A robust credit control function is also essential; all debts must be collected on time, any issues should be dealt with immediately and if payment is not forthcoming, tell clients not be afraid to withdraw services. They should also monitor payment performance closely and follow up if promises are not kept.

If a customer is facing financial difficulty, and your client has already obtained a judgement against a debtor they may be able to seize goods in lieu of the debt due, prior to a formal insolvency.

And if they are supplying a service or goods to a business which goes into an insolvency process, the Insolvency Practitioner may need to enhance the realisations into the estate and it may be possible to contract directly with them to continue services or complete a specific task and so reduce potential losses.

Of course, the most obvious solution is simply not to allow any business to become so exposed to a single trading partner that their failure could threaten the future security of your client’s enterprise.  Sadly, with insolvencies at record levels, this problem is becoming far harder to avoid than ever before.

Submitted by Andrew Duncan - Partner, Bridge Recovery

andrew.duncan@bridgebr.co.uk

The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People

The influential think tank the National Institute for Economic and Social Research reckons the economy expanded 0.2 per cent in the quarter to August – a big psychological boost for a lot of businesses as it would suggest we can consign this recession to history. Exports are up, the stock market is buoyant, and big corporate deals such as the Orange/T-Mobile tie-up and Kraft’s acquisition of Cadbury are being mooted for the first time in ages.

On the darker side, unemployment is still growing. I recently emailed two friends, both of whom were working for large corporates a year ago, to find the messages bounced back. Both had lost their jobs. Next year they will be joined by a crowd of public sector workers as a new government struggles to balance the books. The price of gold has broken $1,000 an ounce, indicating investors are still worried about gremlins in the global economy. And the £8.4 billion fall in lending to non-financial businesses in July was the biggest since records began.

There are surely few periods in living memory when economic indicators have been more keenly pored over, or generated more headlines. And yet it’s businesses that create statistics, not the other way round. Just as you can’t take success for granted in a growing economy, failure is not inevitable in a shrinking one. Whether a company is swimming with or against the economic tide will be determined by the ability of its management to tune into business opportunities rather than the daily onslaught of economic data and expert debate.

www.growthbusiness.co.uk

Image Copyright Flickr

The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People

Some of the banks are reluctant to do so, preferring to use Government support to rebuild balance sheets and lend only to ‘blue chip’ businesses.

But another area is frequently overlooked by the media – the expansion of trade credit. An estimated 80% of all transactions take place on open account and if this percentage could be expanded on a secure basis, the effects on the UK economy could be beneficial indeed.

Moreover, much of the credit granted is normally given and received by businesses broadly described as SME’s. Yet this is the sector least well prepared to do so. Only a minority of small businesses boast a professionally qualified credit manager and in many cases where one is in place, he or she faces a constant battle within the business with an aggressive sales arm (sometimes even the MD) determined to achieve sales at all costs. Frequently there is no
properly formulated credit policy and credit granting takes place in a a vacuum quite independent of the overall objectives and targets of the business. The consequence is obvious – bad debt and poor collections.

In some ways this is surprising. Since the recessions of the 1980’s it has become far easier to reconcile the effective granting of credit with controlled sales expansion. Comprehensive on line
credit information is available to all sectors of the market at a reasonable price. Training in credit management, through the efforts of such organisations as the Institute of Credit Management, has become far more widely available. The number of outside agencies concerned with credit management has mushroomed – factors, discounters, debt collection agencies, are all selling their services to the people on the industrial estates who are the backbone of the economy.

Yet, at CPA we see daily evidence of weak credit management. Goods and services get supplied on open credit to companies who are illiquid to the point of insolvency. Credit limits are ignored or the level of credit is allowed to grossly over run. Invoices are raised on incorrect corporate names or trading styles. Then there is frequent failure to pursue due debt with urgency or to deal with disputes effectively. And so on.

We do what we can to help by giving advice and support.  To some extent the debt purchase service that we offer, provides a framework for effective credit control as it require clients to chase debts and submit them for purchase in a timely way, and then show reasonable care and prudence in granting credit

But of course the scale of the problem is such that it is way beyond the ability of any one organisation to influence it. And it makes you wonder about the extent to which people are missing opportunities to sell to well established and profitable businesses because of an inability to obtain and interpret data. Of course, poor credit control goes hand in hand with indifferent management and sales practice.  How many credit granters are trained to look hard at the figures contained within a credit report rather than simply accepting the credit limit indicated without further analysis – or indeed discussion with the customer? How often do smaller businesses use the copious on line material available these days to market and sell as well as to credit check? Some do of course, but judging from every day experience they are in a minority.

So what to do? The problem is one that will not be solved in the short term and is certainly beyond the scope of government, The inherent ordinariness of the credit management function means that all too often it does not attract high flyers. It is probably the case that a majority of the better trained credit professionals are employed within the financial sector rather than within industry. Yet the importance of cash flow within industry has never been higher and from a lenders perspective, the debtor asset is often the most significant.

So perhaps, here is a way in which the financiers can help to repair some of the damage that has been done to the UK economy in the past two years, By developing advisory services to industry and more important, linking the provision of financial facilities and loans to competence and performance as opposed to old fashioned security they can play their part in raising standards in British business.

Factors and discounters have always made judgements about the quality of a debtor book before granting facilities But these judgements have not always extended to any serious analysis of the people running the sales and credit operations – and lending bankers often have very little idea as to the quality of the people involved, relying purely on formulaic judgements of the quality of security. Even where there is some analysis of the quality of the management and the processes that exist within the firm, if the assessment is negative, the lender simply declines the business and does nothing more.

If lenders were prepared to spend time and resource identifying and plugging the management and operational gaps that are all too often perceived, they would not only raise the quality of the security they need in order to lend but could also  make a real contribution to economic recovery. 

We can but hope!

Contributed by David Hawkins – CPA    www.cpa.co.uk

Creditors of Silver Leaf Capital Partners LLC, the first corporate failure of a CRO Registered Limited Liability Company in Qatar since the establishment of the QFCA in 2005, have appointed Jo Rolls and Steve Parker of Tenon Recovery as joint liquidators.

Silver Leaf was incorporated as an investment vehicle and has secured an initial tranche of capital to cover set-up fees, professional and regulation fees in addition to marketing costs associated with seeking investors.

A meeting of creditors was advertised both in the UK and Qatar and, since information provided showed the majority of creditors were based in the UK, it was held in London on 7th July. All participants were offered the option of attendance in person or by phone.

Following their appointment, Jo and Steve will conduct detailed investigations into the past trading of the company.

Carl Jackson, National Head of Tenon Recovery, said:

“This appointment further demonstrates our ability to handle innovative cross border restructuring and recovery cases.  We have previously completed the first Centre of Main Interest (COMI) deal conducted in the UK.”

About Tenon Recovery
Tenon Recovery is the third largest corporate appointment taker in the UK.  Specialising in turnaround, recovery, restructuring and insolvency in both the corporate and personal sectors, Tenon Recovery is led by 43 directors supported by 350 staff operating from a network of 30 offices across the UK.  Tenon Recovery has strong relationships with secured lenders, both banks and asset-based lenders.  Tenon Debt Solutions assists over 3,000 individuals suffering from sever debt problems – see www.tenondebtsolutions.co.uk

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