SME owners have protested this week over moves by the Department for Business, Innovation and Skills (BIS) to encourage the use of unregulated asset based lenders.
Small business owners, led by the Campaign for Regulation of Asset Based Finance (RABF), demonstrated at the BIS offices on Tuesday 31 March to highlight the unregulated structure of the asset based lending industry, which includes factoring and invoice discounting.
The Government is promoting this funding option to SMEs that have been turned down for a conventional loan or overdraft by banks, as part of its Alternative Funders Initiative.
Unlike bank loans, which are which are protected by the Prudential Regulation Authority (PRA), the factoring and invoice discounting finance sector is only covered by the Sales of Goods Act, the same legislation as for pawnbrokers.
The asset based finance sector funds around £300bn worth of invoices annually for businesses. But, according to RABF, the industry has been rocked by a series of scandals over the forced insolvency of solvent companies, with finance companies profiting from the sale of assets.
Brian Moore, RABF spokesman, says a factoring company can make up to £500,000 as a secured creditor at the expense of HMRC, normally the largest unsecured creditor due to the removal of the Crown Preference.
The industry’s trade body – the Asset Based Finance Association (ABFA) – has launched its own Ombudsman Service.
Campaigners are highlighting the fact that Andrew Bailey, deputy governor of the Bank of England, is advocating a change of legislation that will put 70% of lending under the control of the PRA.
Brian Moore says it is “madness” that an SME can be protected by the PRA for a loan or an overdraft borrowed from a bank, “to then act on advice from the Government for an alternative funder, borrow from the same bank (or any other asset based lender) via a factoring agreement and only be covered by the Sale of Goods Act.”
He added: “We have seen company after company closed for their assets both by the banking and non-banking sector. We will be demanding that the unregulated asset based finance industry is removed by BIS as a recommended alternative lender until the subsidiaries of the banks are covered by the amended legislation as recommended by the PRA.”