First up, AIM-listed Ultimate Finance, whose new venture, Ultimate Asset Finance (UAF), is to be led by Andrew Ribbins, one of the key figures behind combined lender/broker Voss Finance.

Voss, incorporated in 1995, remains active in leasing to SMEs, with a focus on plant and machinery assets. It is a niche lender with a risk pricing model towards the higher end of the spectrum, and yet has suffered virtually no bad debt over the course of the recession. Write-offs only arose from the multiple finance controversy surrounding plastics manufacturer Global EPP – an issue that affected most of the UK’s lessors.

High level of control

Coming from this background, Ribbins will build a relatively small operation at UAF, lending in the single digit millions within its first year and keeping a high level of control over quality of deals.

In the months to come, UAF will move into a new office, which will also house a new regional division of Ultimate’s mainstream business.

Deals will be sourced initially from Ribbins’ own contact book, and from Ultimate’s invoice finance customer base.

Yet, while Ultimate Finance accepts business from intermediaries in its mainstream invoice finance business, its new asset finance subsidiary will not be doing so until it has built up its funding base further.

Currently, UAF has secured funding lines with Siemens Financial Services and Singers Corporate Asset Finance.

Ultimate, which has offices in Manchester, Bristol and Tunbridge Wells, also launched a trade finance business in March – another example of the company’s holistic approach to commercial finance provision.

Furthermore, the future looks comfortable for the group, with the half-year leading up to 31 December 2009 seeing Ultimate make a pre-tax profit of £191,000 (€232,000, up from £140,000 a year earlier) despite a turnover reduced from £2.2 million to £2.9 million.

While UAF will not be rubbing shoulders with the giants of UK leasing any time in the near future, its foundation represents another point in favour of the school of thought which says that asset and invoice finance can work better when under the same roof.

Asked whether there had been any difficulties in providing leasing through Ultimate’s wider sales force, who have traditionally sold invoice finance, Ribbins said: “I don’t think it is too tough to cross train for hire purchase and leasing sales.

“This is a highly professional sales force, and they know how to look at a customer balance sheet, which is fundamental to both product sets.”

“Considering that our leasing product is not too complicated, I think it will be straightforward to spot opportunities for sale and leaseback, for example, with customers looking to acquire cash by factoring book debt”

Meanwhile, another lender with the ability to provide both invoice finance and leasing products is Southampton’s State Securities. The company celebrated the 30th anniversary of its incorporation last month and predicts a promising future in lending across multiple product lines.

Best first-quarter sales

According to sales director Barry Hutchings, who joined State in November 2009, the company has seen its best first-quarter sales total in two years, and during the first half of 2010 expects to double the amount of business it signed during the equivalent period in 2009.

By the end of the year, Hutchings says, annual new business volume is targeted to reach 250 percent of the 2009 total – a dramatic return to form for the subprime specialist.

Another return to form for State could be in property lending. Having withdrawn from the commercial mortgage market over two years ago, the company has only undertaken property loans to support other lending requirements, with standalone commercial mortgage opportunities avoided.

This situation is under review, however, with commercial mortgage products looking likely to once again form part of State’s core offering through brokers. Heavily involved in this discussion will be Graham Jacobs, the property expert who joined State in 2007 after helping the company to secure its new premises.

Hutchings also sees potential for State to grow through its invoice finance offerings. “We do see a particularly strong opportunity to grow our factoring business,” he said.

Hutchings added: “We will continue to produce innovative financing solutions for customers with more challenged credits, including refinance and turnaround finance buy-outs, which a growing number of SMEs require and for which we are renowned.”

More good news

Finally, more good news has come from Microlease, the UK-based (but increasingly global) test equipment lessor with backing from LDC, the private equity arm of the Lloyds Banking Group.

The company’s revenue for the year leading to 31 January totalled £30 million, considerably up on last year’s figure of £23 million, with earnings before interest, taxes, depreciation and amortisation up from £10.6 million to £13.6 million over the same period.

The results represent the fourth year in which Microlease has exhibited more than 30 percent growth, following the management buyout which saw current CEO Nigel Brown take control of the business in 2006.

Despite its name, Microlease is as much a dealer of high-precision test equipment as it is a lessor of such kit. However, according to Brown, it is the offering of financial products, including both long-term leasing and short-term rental, that has really powered growth in the last year.

To see how well the company integrates leasing into its general equipment sales, one only has to look at the authorised technology partner arrangement Microlease has had in place with manufacturer Agilent since November last year.

As a result of this programme, Microlease is now responsible for the lion’s share of Agilent’s sales volume within the territories of the UK, Ireland and Italy, and has been offering a full suite of financial products alongside the Agilent equipment range.

For the first half of the year, says Brown, leasing penetration rates in the Agilent ATP programme was only 8 percent. By the end of the year, however, 36 percent of programme sales were being conducted through leasing of one kind or another.

Microlease has also observed a significant shift in the sectoral uptake of leasing services, with the aerospace and defence industries growing much more receptive to acquiring assets on lease – a trend Brown thinks will continue as the government customers of defence contractors suffer budget cuts in the years to come.

In 2006, the telecoms and R&D industries provided 90 percent of Microlease’s financial services business – now, the defence sector contributes an equivalent volume.

According to Brown, LDC, Microlease’s private equity backer, is “very happy” with its investment in the company, having backed its acquisition of the European operations of US competitor Telogy in September last year. The financial support also helped put Microlease in a position to acquire long term funding lines with RBS and its asset finance subsidiary Lombard, Brown said.

Keen to invest further

He added “I am confident that, if we needed more funds to make further acquisitions, LDC would be keen to invest further”, but confirmed that there were no acquisitions currently being directly pursued.

Microlease recently attempted to acquire an American business that had filed for Chapter 11, but did not win the bid. The target company was eventually sold for $26 million (€21 million).

Looking forward, Microlease expects revenue to increase from £30 million to £50 million over the 2010 financial year, with earnings before interest, taxes, depreciation and amortisation rising from £13.6 million to £18 million.
Article contributed by Fred Crawley, Senior Reporter – Leasing Life & Motor Finance

VRL — Analysis, insight, intelligence

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Richard Pepler, Chief Executive, Ultimate Finance believes that, before examining the different and quite distinct role played by the factor, there is an important distinction to be drawn between the respective responsibilities of banker and factor.

“Both the banker and the factor have first to produce a satisfactory return on their shareholders’ funds but, after this requirement, I believe the priorities part company. The banker has to meet his depositors’ withdrawals on demand because part of this function is to take deposits from the public – an overriding requirement which does not exist for the factor. As yet, factors do not seek or take deposits from the public and are not faced with this responsibility.

The factor is thus better placed to accept more risk and we are at least, to some extent, employed for that specific purpose. Secondly the banker is not equipped with the resources nor does he have the time to monitor the changing quality of the receivables he is called upon to fund. For this reason alone, having regard to his first duties, he should be relatively conservative.

It is through providing these services (as distinct from the mere provision of finance or working capital) that the factor earns himself fee income to sustain his business. He has established a team of specialists backed by a veritable library of credit information and the most sophisticated information technology. For example, his client three hundred miles away can already view his ledger via the Internet within the time it takes to make a telephone call, and the factoring industry is up with, if not in some cases actually ahead of, big brother in the information technology race.

THE NATURAL ROLE OF THE FACTOR

Before we examine the end products of benefits of the various services, let us look at the factor’s natural niche in the market place. Rapidly growing successful businesses often start from a low capital base and the entrepreneurial proprietor prefers to own the whole equity of his business rather than share the fruits of his labours with even the most benign of sleeping partners. He ploughs back all his profits into the business and calls on his friendly bank manager to obtain an overdraft to meet his working capital needs. The bank manager will appreciate a well presented case and the customer who presents his budget, cash flow and audited accounts will probably leave the meeting satisfied that he has made adequate arrangements.

Imagine now his business grows still faster and further. Not only must he carry greater stocks to meet increasing demand but he also has to extend a greater volume of credit – not necessarily in time but certainly in quantity, to a growing bank of satisfied customers. So his asset base expands quicker than his capital base and he needs a bigger overdraft or he embarks on the dangerous course of extending his trade creditors and delaying his tax settlements.

On returning to the bank he is perhaps told that he is overtrading and is advised to pull in his horns. The situation is becoming progressively overheated and the bank manager having regard to his other obligations may be obliged to decline increasing the overdraft facility to the extent requested.

FACTOR v BANKER: A QUESTION OF “CUSTOMER SATISFACTION”

This is precisely where we find the factor’s niche in the market place. The banker has the “customer satisfaction” problem of being unable prudently to meet his customer’s requirements while the customer cannot maintain his satisfactory progress because his own capital resources have not expanded at the same rate as his business. The factor solves both problems, to the comfort of both parties.

Having examined the book debts and satisfied himself that they are of reasonable quality, the factor prices his services and quotes a factoring charge of, say 1.5% of turnover – a sum significantly less than the trade settlement discount the client frequently offers his customers just to pay on time, and incidentally, a sum less than the stockbroker charges to deal in modest parcels of shares on the stock market. For this fee he will render statements to regularly overdue accounts, deal with queries and disputes, and collect in the money, usually about a week quicker than his client did.

But in addition to that, he also offers access to immediate cash up to perhaps 85% of the value of the debts purchased for which extra facility the charge is much the same as the cost of a bank overdraft.

Thus the very first impact of factoring is to reduce the debtors on the balance sheet at a stroke. The client uses, or should use, the money first to reduce trade creditors, seeking at the same time to obtain discounts from them for prompt settlement. This will pay for some, if not all, factoring costs.

Next he can reduce the overdraft if that is what the bank manager requires. At the very least, he will not have to go supplicating at the door of the man he used to call his friend. His continuity of supply of raw materials will be strengthened by his improved conduct of his bought ledger and his own credit standing will increase in the eyes of his creditors.

Of course these benefits will not accrue if he puts the factoring monies into a new factory or buying another business or buying himself a smart car because these expenditures are a gross misuse of factoring funds. It has to be admitted that some people do misuse funds and they run the risk of failure if they do.

ELIMIMATING THE RISK OF BUSINESS FAILURES

Pareto’s law seems to afflict most businesses where 20% of the customers take 80% of the sales and 80% take only 20% of the sales. In the small to medium size business, with limited or stretched capital resources, the unexpected failure of a major customer can spell termination to all the hard endeavour put into building a business and is thus a contributory cause to the unemployment problem.

The commercial view taken by factors of the credit risk eliminates this hazard, often underestimated by entrepreneurs flying on a wing and a prayer. The record number of business failures in the last year or so has, however, brought this hazard home to the market place and the value of bad debt protection being utilised alongside the factoring facility is increasingly appreciated. Indeed with the two facilities running in parallel the clients can now sleep at night.

The benefits do not end here. The factor produces from his system regular statistics on sales, debtor ageing, speed of debt turn incidence of credit notes, cash availability and almost any other information his client requires. Both parties obtain a much better overall perception of the state of the business. The client can see how well or badly the collection job is being done and the factor can see how his client’s business is changing from month to month. This acts as an effective discipline on both factor and client and if adverse trends are not rapidly corrected, then either party can set up a meeting with the other at very short notice. Serious disagreement may lead to mutual termination of the contract at the worst but, far more commonly, realism and reason prevail in the light of the accurate facts displayed and openly discussed.

Thus the factor has reduced and, in some instances, altogether eliminated some of the critical issues facing his client. He need not fail just because of a disproportionately large bad debt, he need not fail because his supply is interrupted by slow payments to his creditors, he need not fail because his overworked staff do a poor job on getting the money from slow paying customers and, more positively, he is enabled to continue his successful growth without sacrificing part of his equity.

Some businesses still fail after factoring because they have allowed overheads to get out of control, or they overstocked, or their quality declined and they lost market, but the factor lays no claim to being able to control these other hazards.

We do claim that the resultant benefits of factoring significantly reduce the totality of business hazards, making the factored business more soundly based, better disciplined more visible to management and finally an altogether better risk proposition.

A NEW RELATIONSHIP BETWEEN THE CLIENT AND HIS BANKER

The client who is factoring thus becomes a better business proposition in the eyes of our now more receptive again banker and relationships improve. Indeed overdraft lending is safer because the sources of its repayments and sales proceeds, are professionally managed and monitored on a day to day basis and in a spirit of enlightened co-operation.

And what about objections?

Most common from the client is “what will my customer think?” coupled with “will my customer be upset by the factor’s collection methods?” If factors were in the business of upsetting their client’s customers they would quickly have no business left themselves. The growth of factoring itself answers this question and it has grown through satisfying a real market need.

The bank manager’s principal objection is that the factor has “taken away” the debtors which he regarded as the principal security for the overdraft. Therefore he must reduce his lending and hence his income and profit. Factors may have been a little slow to grapple with this one, thinking that, since they have to obtain their funds from the bank anyway, the same resultant profit ends up with shareholders – so what?

With the decentralisation of profit centres in the banking system, the fact that one branch’s loss is another branch’s gain is not an altogether satisfactory answer, particularly from the point of view of the losing branch. The problem once clearly perceived, can be solved be recompensing the losing branch in whatever way is considered most appropriate. Thus the manager who has spent time on his customer’s problems can now offer a solution which no longer conflicts with his own interests.

Indeed there is no reason why we cannot create a tripartite agreement between customer, banker and factor whereby the total financial requirement is worked out and then apportioned so much on overdraft and the balance from the factor. The necessary controls and constantly updated information are readily available. Lastly, the availability of ready cash from the factor is geared, not to a finite sum which has to be renegotiated, but to the sales volume generated. Thus it can be used as a more flexible tool to meet the needs to the growing company.

REAL AND NECESSARY SYNERGY BETWEEN BANKERS AND FACTORS

Meanwhile the factors continue to study the ever changing patterns of customer requirements. As information technology becomes cheaper and faster and more widely deployed, so more companies will adapt its use to their requirements, thus assisting the factor in its initial appraisal of the business. It also creates yet further opportunities for the factoring industry through diversifying its products to meet the changing market needs.

The factor himself, like the business he serves, wishes to grow and no one who is aware of his existence beats a path to his door? How does the factor market his admirable wares? He is not seeking millions of customers and his advertising spend is, of economic necessity, small by comparison with many other important businesses.

Interestingly, factors receive many of their enquiries from the banks. It is generally of good quality and the conversion ratio is high. In return, it is very usual for many factors to refer clients back to the banks as new customers.

Thus we see the completion of the synergy circle. The factoring service benefits the customer, the banker has a stronger customer better enabled to grow and the factor has another client. By combining these attributes we reduce the risks inherent in all business transactions. We expect to see both more successes and fewer failures and this in turn will both mitigate the unemployment problem and increase the profits of each party to the partnership.

Contributed by Richard Pepler, Chief Executive at Ultimate Finance Group PLC

Tel: 0845 251 3030

Website:www.ultimatefinance.co.uk