Francis Coulson, the former president of the insolvency trade body, R3, has pointed out, in the Telegraph, abuses by certain invoice finance firms and banks that profit from putting companies into administration. Invoice finance providers are able to lend money to businesses by advancing cash secured against their sales ledger. The Telegraph has been
The providers are exploiting contractual fees, and their preferred creditor status to make money from struggling businesses, she said.
They are "preferred" as they are secured lenders. See our page on creditors ranking in insolvency for further information.
Of course, these companies take on a certain level of risk when they are lending to a business and the ongoing fees should reflect that. However, it has come to light that the termination fees, i.e when the business fails, can be huge. In one case we were involved in, the fees were £200k on a £700k lend. The bank still appointed administrators despite 2 written offers of replacement finance within 2-3 days and a shrinking liability. This effectively scuppered any chance of a rescue and unsecured creditors including HMRC lose out.
The other issue that arises is a conflict of interest. Brokers who pass leads to lenders are often owned by insolvency practitioners. This can create a conflict of interest since the invoice finance provider, as secured creditor, can choose which administrator to appoint and when.
A campaign group called www.rabf.org.uk or Regulation of Asset Based Finance are pushing parliament to consider the industry.
Given the banks are reluctant to lend alternative forms of of financing are seeing large growth with even Wonga.com getting in on the act. In our view it is important that this industry is monitored and bad practice and conflicts of interest stamped out..