Michael Bickers talks to Simon about the UK factoring and invoice finance industry

Lloyds TSB Commercial Finance (LTSBCF) is one of the leading players in asset based finance in Europe with 22% of the UK market share, according to ABFA.  With many years of successful trading and offices in the UK, Europe and the US, the company occupies an enviable industry position, boasting more than 10,000 factoring, invoice discounting and asset finance clients*.

In August 2008 Simon Featherstone was appointed Managing Director LTSBCF following the retirement of Ted Ettershank.  Prior to this, Simon was Network Director for Commercial Banking. Before moving to that position in 2004, he was Deputy Managing Director for Sales Financing at Barclays. I recently met with Simon at Lloyds TSB’s offices in the City to find out how the company was performing at present and to also get his views on general aspects of the industry, particularly in the light of the current economic climate.

Bickers: How would you summarise the current trading position of Commercial Finance?

Featherstone: We’ve had record levels in terms of numbers of deals and hopefully on track for good profits too – we are ahead of budget year to date. In 2009 everyone was adjusting to significantly lower volumes and modifying budgets accordingly, but 2010 has been a much better place for our industry.

Bickers: Was the reason for this because the cost of money was lower?

Featherstone: The cost of short term money has now come down, but it remains high for long term money. But the main change is in that providers have re-priced for risk and associated costs in doing this. This is where the market was getting into some confusion, because some industry players had not previously been pricing for risk properly.

Bickers: So has the recession been good, bad or indifferent?

Featherstone:  It’s been good in that it’s made everyone look at risk in their businesses and re-evaluate it and also look at costs. It has been bad in the sense that there has been volume loss of assignments. You could have expected to see a pick up in volumes in a recession, but according to ABFA statistics, this did not happen.  We are now seeing an increase in volumes coming out of the recession.

This recession has also been different. Debt turn has come in by 10 days. When we saw the figures we were amazed. In this recession, businesses have been much more focused on collecting cash. My theory on this is that businesses have been fed 24/7 immediate news and from all directions – large TV screens at railway stations, Blackberry’s etc. This is the first recession where we have had this kind of coverage. This has emphasised the situation and made it feel far more immediate and that has prompted a much faster, protective response by businesses.

Bickers: How do you see invoice finance progressing over the next five years?

Featherstone:  I think there will continue to be indirect consolidation. We’ve seen players stop altogether rather than being purchased.  Maybe one or two new entrants too. But the market has to find a way of differentiating and improving its offering over traditional bank finance. We need to continue striving to meet our clients’ needs  and provide a quick and simple process for accessing finance. Some businesses might consider that an overdraft is easier to access and brings less paperwork, so we need to find a way of delivering the product set ever more simply to clients and also look at our own costs to deliver it.

Bickers: Is your supply chain finance product achieving success?

Featherstone: It’s an interesting question and I could get a bit controversial here, but to my mind this area of the industry has been the ‘flavour of the month’. Although we have seen a lot of interest from major PLCs wanting to put a system in place, we have not seen much actual usage once that happens.  I don’t think that SCF is being used to its full extent despite the fact that it’s a quality product which could benefit all parties – suppliers and PLCs.

Bickers: So do you think that a lot of the trade finance banks who are currently getting into the supply chain finance space are perhaps wasting their time?

Featherstone: I’m sitting on the fence at the moment unless someone’s got a different way of persuading suppliers to use it that I’m yet to hear about. But if you talk to suppliers they are a bit cynical about it.  We have just launched our multi-currency facility, so we’re committed to providing a comprehensive suite of products which meet the requirements of businesses of all sizes.
 
Bickers: What about new products – anything on the horizon?

Featherstone: We are just about to enhance our client charter and launch the first charter for our new business introducers. These are not new products as such, but we’re upping our game in terms of quality of service and the promise we make to clients and introducers. We believe we are the first major player to do something like this.

Bickers: Is this not already covered by a general Lloyds TSB banking charter?

Featherstone: There are ordinary banking charters but none that cover asset based finance as far as we’re aware.

The introducer charter is about showing our commitment to businesses and enhancing the external perception of the finance sector. If the industry is going to prosper, it needs to attract more clients, by continuing to develop its products and services. There are between 150,000 and 350,000 businesses in the UK that are capable of using factoring and invoice discounting services. At present, the client numbers are only about 43,000.

Bickers:  Many would argue that invoice finance should be kept separate to traditional bank lending and that providers should operate in different departments and even buildings to help achieve this. What’s your view on having these facilities delivered as a separate entity to traditional banking services?

Featherstone: The processes and approach and mindset are different. It needs to be kept separate from a risk process perspective, but the way it works is for the benefit of the invoice finance business and the banking business. If you package these together for the benefit of the client I don’t see why that should not work. We are a relationship bank, and we genuinely believe we can deliver a better service if you bank with us as well. You need specialisms in a bank but from a relationship point of view it’s much better to have one main contact.

Bickers: What about back-to-back factoring, and developments there?

Featherstone: We are still doing back to back factoring and still looking for more clients. We are currently backing 10 UK independent factors. But we are not looking to do this outside of the UK at present though.

*ABFA statistics Q1 2010