Factoring firm calls for ban on termination fees
Factoring companies that lend to businesses that subsequently fail, often within weeks, should be prevented from receiving termination fees.
The comments, from the alternative lending provider Nucleus Commercial Finance, challenges the current practice from some quarters of the asset-based lending industry that allows businesses to lend to ailing companies in the full knowledge that they will fail – and are even allegedly made to fail – sometimes only days after new funding has been agreed.
Chirag Shah, Managing Director of Nucleus Commercial Finance, says that the practice needs to stop, and that plans by the Asset Based Finance Association (ABFA) to draft a new Code of Practice are now well overdue: “A new Code is needed to bring greater clarity and credibility to an industry that is in danger of self-imploding,” he says.
“But this whole unsatisfactory issue can be resolved by one simple rule: if the ABFA actively discourages the payment of termination fees to factors that lend to businesses that subsequently fail within a period of perhaps six weeks, it will solve all of the problems at once.
“Businesses that are bringing the industry into disrepute will be isolated, and very soon put out of business, and the reputation of factors, brokers and insolvency practitioners who are often involved in theturnaround process will be better protected.
“The sometimes too-comfortable relationship that exists between lenders and IPs, either implied or actual, and which has aroused such mediaexcitement and in the blogosphere will no longer be a distraction,” he adds.
Chirag believes that removing the elephant in the room will enable more focus on the good that asset-based lenders are doing to providevital cashflow to cash-strapped businesses: “We need firm action and firm leadership from the ABFA to prove their independence and bring greater transparency to the good works of our industry and highlighting the estimated £240 billion of cash we provide to businesses every year.”