BRIAN SUMNER 45 years in Invoice Finance Director

BRIAN SUMNER • 45 years in Invoice Finance • Director – Alex Lawrie 1979 -83 • Founder Managing Director , (Lloyds) TSB Commercial Finance • Founder Director ABFA • Founder Managing Director, Five Arrows Commercial Finance • Founder Director , Ultimate Finance • Founder Director Gener 8 Finance , Oxon– Invoice Discounting Specialists-Non Executive ‘Risk Director’

BRIEF HISTORY OF FACTORING AND DISCOUNTING • Principle 1000 s of years old in simple forms -Romans , Ralph Nickleby. Debt buying. • Developed in modern form in USA early 20 th century onwards based on NY Garment trade • Developed 60 s onwards in UK and Europe-FNBB, International Factors and Alex Lawrie • 1980 s onwards- development of CID and derivatives in UK – already well Est. in US • 25 years of dramatic Worldwide growth from early 1980 s • Products growing fast Worldwide • Growth of Independents funded by ‘Back to Back ‘

THE MISUNDERSTOOD FACTOR ? ! • I’VE HEARD IT ALL IN MY TIME! • • • “Expensive “ “Debt collectors” “BAD DEBT Financiers” “Lender of last resort” “You Invoice Discounters can’t lose “ ! Very hurtful remarks for our sensitivities!! • BUT LOOK AT THE STATISTICS AND THE FACTS AND THEN JUDGE

ABFA STATISTICS (extracts) • 42, 000 Clients in UK (of which some 80% sub £ 5 m turnover) • 31% Mnfg , 30% Services , 7% Transport • £ 200 Billion Total UK Sales Financed 2010 • £ 15 Billion Advanced • 1. 2 Trillion Euros Worldwide Volumes (IFG) • Clearly we are doing something right as its now very big business!

PRODUCT RANGE • A Product for all based on Debtor Asset – full range niche products • Factoring with and without Recourse –Full Service. • Invoice Discounting (can be confidential) for the more administratively competent and profitable companies. • Full ABL incl. Stock (can be warehoused ) , Plant etcbigger deals • Export Factoring. Making exports easier- The 2 Factor system (IFG/FCI) Collections and Credit Management. • IN ALL CASES THE DEBTOR ASSET IS ISOLATED AND ASSIGNED / PURCHASED BY THE FINANCIER

THE BENEFITS OF RECEIVABLES FINANCE , ABL AND FACTORING • • Cash-flow support maximises borrowing facilities Up to 90% of Approved Invoice values available. Solves sellers problem of slow paying customers Sales ledger / credit control management and Debtor Insurance all optional where beneficial. • Flexible v Bank loan/Overdraft -grows with growth automatically and often MORE available. • Focus on Assets not Balance sheet • Borrow down the Individual Asset Classes to maximise Borrowings

Target Markets • Companies selling goods or services to other companies including Export • Start –up SME to Mid- Corporates. £ 100 m sales plus. • Financable Debt type-sell and forget -suitable sectors! • Often (but not always ) undercapitalised Businesses where Receivables and Stock main assets • Start-ups often benefit from Full Service Factoring • Can assist finance of MBOs and ACQUISITIONS – LEVERAGED TRANSACTIONS. Reduces equity loss.

MANAGING RISK • • “We”ve considered every Risk , except the Risk of Avoiding ALL Risks “ What is RISK ? “A Class of uncertain events which may affect the well being of the Decision maker or a class of decision makers” RISK CAN BE MITIGATED…. Risks need to be quantified , understood and Priced in We MONITOR the Clients Trading and Performance We Manage BUYER(Debtor) Risk We Manage SELLER(Client ) Risk

ASSESSING THE DEALUNDERWRITING PRINCIPLES • This is not a balance sheet lend but. . . • An understanding of Borrowers(Sellers ) financial standing and Financial History required • We (try to ) Assess product quality –tried and tested products • Strong Cash Flow better than alleged profit or Balance sheet net worth • Is the Client (Seller )Management experienced , of good status and clear of convictions etc • Is the company profitable now or in the near term ?

UNDERWRITING PRINCIPLES 2 • Sales ledger quality 1 st , second and third!! • Debtor Creditworthiness- are they selling to Buyers of standing ? • Concentration v Spread ( can be commercial) • Collectability of debtors. Debt type – ‘Sell and Forget’ products ? • The 3 Ps - People , Product, Performance

UNDERWRITING PRINCIPLESTHE DISAPPEARING ASSET • • • UNDERSTANDING THE DEBTOR ASSET THE NO NO s –TO BE AVOIDED : Buyers ‘Ban on Assignment’ of the Debt Sale or return On consignment Stock -paid for only when sold Agency debt - not owned Reservation of Title Contras. Seller also buys from buyer Invoices in advance Stage and progress invoicing-liquidated damages-non completion of contracts- Construction Industry • Partially completed contracts generally • Product warranties-unless back to back with manufacturer?

RISKs INHERENT IN INVOICE FINANCING-THE PITFALLS • I’M OFTEN TOLD IT’S RISK FREE for us • So let me explain how we can lose money • Product failure or service dispute leading to uncollectability. Debtor CAN pay but WILL they? • Debtor(Buyer ) failure • Client (Seller ) failure –why? • Some Fraud is inevitable. See later slide • Quality of Clients Financial and administrative Management • Onerous contracts NOT DISCOVERED

MANAGING BUYER (DEBTOR) RISK • Check creditworthiness and status of Buyer (Debtor ) • Watch Debtor days – how quickly does he pay ? • Have we the Pods /Satisfaction notes or access-proof of debt? • Look for Contras , set-offs and large amounts of credit notes • Deterioration in financial standing of Buyer- possible Buyer failure • ENSURE Buyer pays Factor / Bank Account direct where possible • Take timely legal action against dilatant Buyers • Recourse to seller if debtor fails BUT……. can he reimburse us if uninsured ? • Credit Insurance mitigates IF available but many will not take it

MANAGING SELLER(CLIENT) RISK - Spot the danger signs • Watch for poor admin / chaos in their office • Deterioration in Sellers Financial performance-cash flow problems evident? Losses? Desperate for cash? • Unpaid creditors incl. VAT/PAYE • Watch the stats – collateral dilutions in particular • VIZ: Invoicing down, days outstanding out, credit notes /disputes up ? Collections low/cash not received for a few days • Breaking terms of agreement • Uncompleted work / contracts • Left with a ‘Collect out ‘ sometimes unsupported by Client

SOME(CLIENT)FRAUD IS INEVITABLE ! Some examples • • • Banking cash Early invoicing- pre delivery False invoicing-CITITRUCK case Collusion with customers (HARRIS case) Kiting cash(raising FALSE invoices then seller pays them himself later with our money on new FALSE invoices) Creating false customers Creating false PODs-CITITRUCK Case FRAUD CANNOT LIVE FOR LONG IN A ‘BEST PRACTISE’ ENVIRONMENT! ‘KILL TIME’ concept.

THE FIELD AUDIT-PRE AND POST FUNDING • Check their Financial Management and Book-Keeping systems. • Stat and Management Accounts / cashflows/Budgets • Investigate the Sales Ledger- debt type -old debt –quality of customer base. Credit management competences. Level of Credits. • Look for concentration debt - Spread always best • Debt Collection performance- debt turn • Trade and Statutory Creditor position • Audit trails – Order to Delivery systems, PODs , Satisfaction notes etc • Touching the Collateral-sample INVOICE VERIFICATION- email/ telephone -VITAL

MANAGING SELLER RISK – What can I do if it starts to go wrong? • Seller about to go under ? You are providing Funding line to Seller. Can I save them ? • Know your rights - understand the documentation and Agreement • Up the Verifications - look for the banked monies or Credit note not advised ? Ensure secure in the debts • Field Audit- go and have a look • Keep funding tight - consider wages only - tickle along, try to keep them going while strengthening your position. No precipitate action • Does an ‘Administrator’ have a role ?

MANAGING RISK OVERVIEW • To take Risk is inevitable but it must be controlled and limited by “Best practise” from quality underwriting through good client management and asset monitoring • We must always understand underlying contracts and highlight any issues for Underwriters • Aim is to be secure in the underlying Collateral at all times- check main customer/s ‘Worth’ • Determine APPROPRIATE % Advance Rates and understand how lower advances can mitigate risk • Understanding / Checking that individual transactions within each financing arrangement have been contractually COMPLETED before financing. • Establish the Right to Litigate against the Debtor (Buyer)

MANAGING RISK –OVERVIEW 2 • Foster good client relations and keep close • Bedrock is clear ownership and ongoing monitoring of Receivables under management • The crucial role of Debt Verification- pre financing and Top 10 monthly debtor balance Verification vital • “The Acid Test “ of the quality of our systems is when we successfully recover our funding from the Debtors following Client failure. • We don’t EXPECT to write off much !

THE IMPORTANCE OF CLIENT RELATIONS AND SERVICE • To encourage New Business AND increase security • KYC- visits , ongoing contact- closer relationship than Banking • Try to meet the clients expectations – be supportive • Be a good listener • Keep on top of the Client’s issues …. . • Do not become part of the problem- try to be flexible • Optimum Risk management follows good collateral management , good service and good client relations • Companies fail when they run out of CASH and this can be monitored

THE PLAYERS • ABL SPECIALISTS and for larger Deals and Buyouts– LTSB Commercial Finance , Venture Finance • INDEPENDENTS(For personal service ) SME, Ultimate, Gener 8 • FOR EXPORT – Eurofactor , Ltsbcf • FOR SMALL DEALS –Ashley • BANK FACTOR – Hsbc , Ltsbcf, Close

THE FUTURE ? • Looks good -more of the same-quite hungry • More Business require CREATIVE FUNDING due to Reluctance of Banks to lend • Lending better secured for the Bank so switching many Overdraft customers to Invoice Finance products • Growth of Specialist ‘Broker ‘ Market BUT we like ‘Added Value ‘ that Accountancy Firms bring to the deal • Continued Growth of Full ABL Lending packages for Larger Cos. • Invoice financiers are ‘Open for business’!! General shortage of funds for SMEs BUT our market still out there and the products WORK!

Questions ?