Asset-based finance ordered to clean up its act

James Hurley
Published at 12:01AM, June 23 2014

Lenders that provide £18 billion to small businesses have been told to “clean up their act” or face tighter controls amid claims about controversial fees and abuses of insolvency.

The unregulated asset-based finance industry, which lends to more than 40,000 businesses in Britain and Ireland, is facing increased scrutiny.

Insolvency experts and a campaign group allege that some independent lenders secretly try to sign up businesses likely to go bust, or even that they engineer the insolvency of their clients, in order to profit from their collapse at the expense of the taxpayer and other creditors

The sector’s trade body, the Asset Based Finance Association (ABFA), launched a new approach to self-regulation last year to tackle perceived problems.

However, MPs have told the group that further “fundamental” reform is required if formal regulation is to be avoided.

ABFA’s members lend to small businesses against their assets, typically advancing money against invoices by taking security over companies’ debtor books.

The sector is being looked at as part of a Treasury Select Committee inquiry into lending after complaints from small companies that they have nowhere to turn if something goes wrong with their loan.

There is also concern that so-called “termination fees” for clients that enter administration are being abused. These fees are ostensibly to cover the risk of a client leaving before the end of their contract but are charged when a client goes bust, often when the lender appoints an administrator. The fees can dwarf the total amount lent.

Geoff Swire, an insolvency expert, has compiled data for The Times which indicates that in the first five months of 2014, more than 10 per cent of administrations involving asset-based financiers saw businesses going into administration less than 60 days after they first agreed to work with a lender. Contracts tend to last at least a year.

ABFA produced a new code of conduct and dispute resolution service last year, but MPs are worried that the industry is not doing enough to tackle the abuse of termination fees, and that since ABFA is a voluntary membership organisation, not all of the industry is covered by the code.

ABFA says it is limited in how proscriptive it can be over the use of termination fees by competition law.

Andrew Tyrie, the Treasury Select Committee chairman, said: “Quite a lot of movement is needed or [this is] going to be one of those cases where self- regulation hasn’t worked”.

ABFA said: “We will consider any recommendations made by the committee very carefully.”

Brooks Newmark, Conservative MP for Braintree, said that while he accepted that most of the industry was reputable, a small group of rogue lenders was “poisoning the well”.

“If ABFA and its members do not clean up their act . . . I will be calling for much tougher regulation from the outside. [The industry] has got to deal with the incredibly bad practices destroying some perfectly healthy businesses.”

The ABFA spokesman added: “We are pleased that the Committee recognises the important contribution the industry makes to the UK economy and the excellent practice that is the norm. It is in the interests of the industry to address instances where standards have not been met.”

Brian Moore, the chairman of the Campaign for Regulation of Asset Based Lending, said: “We want small businesses to be able to use asset-based lending with confidence. That won’t happen while the industry remains unregulated and while small companies have nowhere to turn when powerful lenders take advantage of them and their creditors.”


Big businesses turn to asset-based finance

Use of loans secured against unpaid invoices, properties and other assets rises fivefold in a decade

By James Titcomb

6:00AM BST 23 Jun 2014

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Big businesses are increasingly turning to loans secured against property and other collateral to fund investment, with the use of asset-based finance (ABF) reaching an all time high last year.

Companies with revenues of more than £100m secured funding worth £5.1bn under ABF, which includes loans secured against unpaid invoices, stock, machinery and property, in the year to March, according to the Asset Based Finance Association (ABFA).

This was up 16pc on the previous year, and five times the £1bn of a decade ago. Big companies’ use of ABF leapt during the credit crunch as they found bank loans and investment more difficult to come by.

According to the ABFA, 315 big businesses used asset-based finance compared to 81 in 2004. The practices of many ABF lenders have come under greater scrutiny as their popularity has increased, and some have criticised what they see as excessive fees and unscrupulous practices.

The ABFA introduced a code of conduct for its members last year to respond to the accusations.

“We’ve entered a new era for business funding, where asset based finance is an everyday part of the commercial finance toolkit for businesses of all sizes,” said ABFA chief executive Jeff Longhurst.

“There are general concerns about the availability of finance for businesses and the consequences this could have for the recovery. The asset based finance market in contrast – while it has grown sharply-still has unused capacity, and providers are actively looking to grow their lending books.”

The body said invoice-based finance, in which the provider often charges a fee to settle the invoice, remained the most popular form of ABF.