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Déjà vu via FT.com

The first edition of Business Money, published in 1993, carried a feature with this very headline. It addressed some of the myths voiced about this medium of finance.

They have resurfaced, and sadly, with the imprimatur of the Financial Times. Penned by Jonathan Guthrie, enterprise editor, the headline reads: “Banks’ invoice financing gets cool reception”.

It ascribed to the banks a cynical motive of seeking to increase profits, rather than address customer needs, and was reinforced by the routine journalists’ staple of a few quotes.
It was within the quotes that the instigator of the headline emerged in the shape of Clifton Asset Management and one of its directors, Anthony Carty.

I have much time for Clifton Asset Management, it looks after my miserable pension pot, and it is shrewdly marketed. Roam the Clifton Asset Management website and you find constructive comment on invoice finance.

A capacity to run with the fox and hunt with the hounds has to be admired. It is a risky pursuit, though, where reputations for a complete grasp of complex financial matters could be at stake. Whilst the research methodology employed by Anthony Carty is, no doubt, impeccable, his interpretation of the outcome probably reflects more naivety than malice: but it could be damaging.
His flawed observations, voiced in a press release regarding awareness, and take-up, under the EFG scheme, caught my attention some months ago. And now his name pops up again, leading Jonathan Guthrie into penning a, less than wholly fair, feature on invoice finance.

The suggestion in Jonathan’s piece was that banks were peddling invoice finance when they should be offering overdrafts. This has all of the logic of accusing Marks & Spencer of offering some of its customers brassieres when it should be selling all of them jock straps. It was that misguided.

There are three main avenues of working capital finance.

• A bank overdraft is appropriate where the security is sufficient and the facility requires low level monitoring. Outstanding invoices could once be a feature of that security cover but this became impossible to any great degree following the 2001 Privy Council ruling in the Brumark case. It was not banks that gave up on more flexible overdrafts for business: it was the courts.
• Factoring is a particularly adaptable medium of current asset finance that, converting outstanding invoices to cash as it does, actually grows as a business grows. It often obviates the need to find expensive equity and the tiresome conditions and people that can come with it. It offers business owners a huge choice as to where they go and is often made available to companies in the early days when capital reserves are low but opportunity is high. Sales ledger management is an integral element because the lender has to protect their position but it is also a role taken off the growing business allowing it better use of scarce human resources. Many companies retain this facility even when no longer borrowing.
• If a sound company is going through a growth, or acquisition, phase and the bank likes the integrity and capability of the management, then the much cheaper option of invoice discounting is appropriate, though still more expensive than an overdraft. The customer manages its own sales ledger and regular management information is required though is now often automatically delivered to the lender through computer links to the clients’ accounting systems.

Banks want to lend as much as possible to business but must avoid bad debts. The structure of the advance can only relate to the assets available as security: the costs increase with the degree of monitoring required. Overdrafts are usually secured on property which is static: outstanding invoices are revolving, of collectively volatile value, and many companies have only invoices to offer.

Anthony Carty claimed that of 1,000 companies surveyed, 390 were in regular contact with their bank and, of these, 60% had been offered invoice finance: that is 234. The number equates to the percentage of SMEs that borrow to fund their business, between 20-30%.

So the banks were doing their job properly: bringing all of the available options to the notice of those customers that may need to borrow to go forward yet maybe lacking the asset structure to be granted overdraft facilities.

42,000 UK companies employ invoice finance. Between them capable of generating annual sales of £50bn, this does not suggest their management teams came up the river on the last boat.

So Jonathan, if Carty strikes again, call me if you need a friend. Clifton Asset Management has a first class pension-linked business loan product to sell but its press releases can often mislead. Shock-horror stories tinged with half-truths, and those fabled statistics, might be found in lesser titles, but please, not the Financial Times.