Asset Based Lending Growth – but problems remain in traditional markets

The Asset Based Finance Association (ABFA) reported on the 26 August 2014 that its members had provided a record £18.9 billion of funding to businesses in the quarter to June 2014, an increase of 10% over the previous year. The Asset Based Lending market has never been in better shape, and is one of the few forms of lending that is consistently growing.

While that is impressive growth and an indication of the desire of Asset Based Lenders to finance businesses in the UK, there are still traditional, and important, markets for Asset Based Financiers (ABFs) where the levels of finance required is proving harder to come by. One example of this is the Recruitment Sector.

The Recruitment Sector

The financing of the supply of temporary labour has long been a favoured industry for ABFs and the suppliers of labour because of its well documented supply procedures and obvious funding gap between the weekly payment of labour and usually monthly payment from the customer. 

However, the increased use of the aggregating services of Managed Service Providers (MSPs) and Recruitment Process Outsourcers (RPOs) has interfered with that because of the contracts they use and its impact on the underlying receivable. 

ABFs provide finance by way of an advance against the value of the debts incurred by the customer for supplies by the labour supplier, which are assigned to the ABF. This works well in the Recruitment Sector: systems evidence the supply of labour and eliminate potential disputes, and customers are typically large, and able to settle their debts. These criteria enable ABFs to provide high levels of finance against the assigned debts.

Where an RPO is involved, the supply of labour is to the MSP/RPO, who supply that labour to the end customer under separate contracts. This makes the MSP/RPO the customer in the eyes of the labour supplier and the ABF. The MSP/RPO may have lower net worth than the end customer. If there is a concentration of debt that arises because of the aggregating effect for the labour supplier, or indeed for the ABF because of a number of its labour supply clients being exposed to the same RPO, then the level of advance that the ABF may be reduced, causing possible financial stress for the labour supplier.

Add to this scenario the contractual position typically adopted by the MSP/RPO that the MSP/RPO will not be obliged to pay the labour supplier (or its assignee) for labour supplied to it unless or until it is paid by its customer. This puts the ABFs ability to fund the debts of the labour supplier under even greater pressure, because the MSP/RPO claims not to have to pay the assigned debts at all unless it is paid by the customer. This makes the debt practically unenforceable and raises the question of whether, if the MSP/RPO is not obliged to pay, it is a debt at all? 

In addition, the MSP/RPO, when dealing with the labour supplier, will often refuse to recognise its assignee, the ABF. The Government has now published a bill to prohibit the banning of assignment of debts in contracts as a means to seek to overcome this burden and give labour suppliers (and others) access to receivables finance in this way. Nevertheless, that is not law yet and so in the meantime ABFs face this hurdle too in funding labour suppliers.

The net result of the above for the Recruitment Sector, where labour is supplied via an MSP or RPO, is that the availability of funding for suppliers of labour may in fact be more restricted than in other market sectors.

In conjunction with a cross-member working party of the ABFA, which I chair, the Association of Professional Staffing Companies has sought to help its members and the members of ABFA, as well as other suppliers of temporary labour, by introducing a code of conduct for its MSP/RPO members. The aim is to have signatories to a code that:

  • recognises the assignees of the labour supplier;
  • replaces any pay when paid clause with a longstop payment date (ie payment terms); 

or

  • allows the labour supplier to contact the end customer directly if any account remains unpaid but undisputed.

Whilst welcomed by virtually all the parties operating in the Recruitment Sector and embraced by some of those in the MSP/RPO market, it has unfortunately not yet achieved the change in method of operation of MSPs/RPOs that was hoped for. In some instances MSPs/RPOs have declined to make any changes to their standard contracts with labour suppliers, will not recognise assignees, and have continued to use pay when paid provisions and prohibit access to the end customer.

This has meant that the labour supplier and its ABF have had to seek changes to contracts to cater for these issues on a case by case basis and, where that is not possible, ABFs may limit the funding that they can provide.

Whilst ABFs are very adept at seeking to provide the finance that their clients need by working around such obstacles, in this market these issues continue to cause funding difficulties.

In other markets where risk has been pushed down the supply chain in this fashion from larger organisations or from those in a position of commercial strength, the Government has needed to intervene to stop this process and allow unimpeded access to funding for the smaller and weaker parties in the supply chain. This was the case in the Construction Sector where the Housing Grants, Construction and Regeneration Act 1996 prohibited the use of pay when paid clauses, other than in the (unlikely) event of insolvency of the end customer.

Perhaps, if the market cannot right itself to level the playing field for those participating in it, and it appears to be struggling to achieve that, the Government should intervene again. After all, there is a precedent for doing so.