Recent figures from the Asset Based Finance Association (ABFA) suggest that growth within the niche sector has stalled, falling to a rate of just 2 per cent in the past 12 months.
Richard Keenan, co-director at the Lutterworth-based commercial brokerage, has warned that many brokers are making empty promises in order to compete with a high rate of competition in the asset-based lending (ABL) arena.
He said: “Despite the on-going challenges for businesses looking for sources of finance, there are a surprising number of new brokers and financial advisors breaking into the ABL and factoring sector.
“Such alternative finance to ease working capital, including ABL or invoice finance, is being seen by some brokers entering the market as ‘ripe for the taking’, with some claiming they can secure a better, more competitive deal than businesses already have in place.
“Indeed, some brokers see this as a way of creating income with a large increase in the number of existing factoring finance agreements being circulated as ‘new leads’, which is of great concern to us.”
Richard added: “We have seen this many times, and businesses should be careful. This type of tactic is probably nothing more than an empty promise to woo business to drive-up a brokers’ own new business levels. From first-hand experience, the deals quoted rarely stack-up, and businesses should ignore such approaches, and realise if it sounds too good to be true, then it probably is.”
According to the ABFA’s findings, there is an increase of just 4 per cent in the number of businesses using asset-based finance when compared with the same period last year, amounting to just over 43,000 firms.
Richard went on to explain: “These figures illustrate what a relatively small section of the market alternative finance represents, but many brokers are trying to muscle in on this specialist sector, entering the market to generate income by encouraging small businesses already aware of ABL, for example, and seducing them with the promise of a better deal.
“Businesses must be careful to look closely at the deal from these brokers – and as advisors, brokers need to be sure they are offering genuine added value from persuading these businesses to leave one factoring arrangement to move to another. Disappointingly, it is only the brokers and intermediaries benefiting from such a switch.”
There are many reasons why an invoice factoring provider may be happy to let a client leave a contract early or a client may wish to explore the market to investigate whether a better funding package could be available.
Richard added that such early terminations, however, could have repercussions: “Many factoring arrangements include a fee for terminating the agreement early, so a financial advisor who advocates such a step really should be questioned on whether this represents the best advice. A good broker will strive to understand on what basis a business or the factor feel terminating the contract early is right, and then explore the likelihood of this before investigating alternatives.”
He concluded: “If an Embark client seeks an alternative factor we would certainly explore all chances of rebuilding or keeping the relationship on track as there is no long term win for anyone in simply churning and reinventing deals, especially the business using the finance.
“A professional and ethical broker would always look to resolve any issues an existing client has with their incumbent factor and if this isn't possible then consider the options. It is fine to explore the market for alternatives but a potential waste of time and energy doing if a termination fee, often standard on ABL deals, makes it unworkable.”
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