Archive
Brazil. An economy in crisis?
In my recent piece on the excellent book Breakout Nations, I noted that the author was probably the most critical of the mismanagement of the Brazilian economy. In his view, there was an over-reliance on commodities allied to an overspend on social welfare where the desperate requirement was for investment on the infrastructure. An infrastructure so poor that it was cheaper and quicker to import soya beans from China than from one part of Brazil to another.
The book was published three years ago and his predictions have come to pass
The prospects for the economy continue to look poor. Inflation is 7.5% and interest rates have been driven higher to 12.5% in an attempt to curb this. With growth down to virtually zero it is easy to imagine that the consequence of this will be a prolonged recession
Why is an economy which is clearly stalling and has been for some time, experiencing such relatively high rates of inflation? There are a number of factors (explained in detail here) including a fall in the value of the currency which has driven up import prices but also the simple fact that index linked minimum wage levels have driven up wages at unjustifiable rates, most especially in the public sector
The government was elected on firm promises to much of the electorate and naturally minimum wages and index linked rises were clearly going to appeal to a nation where much of the electorate is far from economically comfortable. Its a hard policy for opposition parties to campaign against, not least because the damage will be caused in the medium term rather than the short term. The catastrophic shambles that is Venezuela is a perfect example of mass appeal creating chaos. Brazil does increasing look like a version of Venezuela lite and this could be a hard lesson learnt.
Insolvency Practioners under pressure?
At long last IPs are going to be forced to give clear advance indications of the costs of an insolvency. This is not just overdue but scandalously so. Such requirements should have been in place decades ago and every experienced credit manager will recount tales of clear rip offs. The most significant I came across was executed not by some shady back street outfit but one of, if the not very, biggest name in the industry.
What will be the knock on effect of this? Clearly it could easily shake up the industry where there are perhaps too many current players and it could also strengthen the arm of medium or smaller practices prepared to play an honest game.
Free data from Companies house
As a happy user of Duedil for the past few years, I was somewhat dismayed to see that only the most recent accounts of any business were now available free of charge. As someone who sets a strong premium on the the value of a businesses trends over any given period of time, this severely hampered my ability to credit check for my clients
Not good news and I was resigning myself to having to pay for a subscription, which does not always come cheap. That is until I read this
https://www.gov.uk/government/news/free-companies-house-data-to-boost-uk-economy
Yes. All data will now be free from companies house. Absolutely terrific news and a great initiative by my local MP, Vince Cable
Thank you
The media and Co op bank
You may well be aware that I have stated on many occasions that the Uk urgently needs more genuine competition in the business banking sector. Because of this the shrinking of the Co op bank with its well publicised difficulties has been very unwelcome. Before the crisis they were actively courting the business market.
Happily it would appear that there is a gradual turn around in fortunes and within time I hope to see them back aggressively courting business
Why? Because quite frankly the high street lenders are less than enthused or professional about winning new business from businesses. This is especially true of sub £1m turnover companies. Allied to that a brash new player in the market is gaining a reputation for being out of its depth and offering poor service
The market is there to be exploited..
Another interesting aspect is the reporting. Contrast the BBC and the Guardian. One concentrates on the matter in hand and the other the chairmans salary. Draw your own conclusions
http://www.bbc.co.uk/news/business-32082605
http://www.theguardian.com/business/2015/mar/27/co-op-bank-halves-its-annual-losses
Fundbox. Another online platform
Is it possible that in then not to distant future, online “alternative” invoice financing will out perform the traditional facilities?
Despite the overwhelmingly positive publicity, that prospect is further off than many would like to imagine but there are an increasing number of new players in the market, the latest of which is pictured here.
The first slightly cruel observation was ‘here we go again’ with a group of beards in the corporate tee shirt. The look has become as familiar as a bad grey suit in the banking industry. The next thought was to wonder what they could offer that was different to what we have seen before and the answers that sprung to mind were ability to fund small items and pure speed.
A facility that can genuinely fund very small accounts with no formal contract or arrangement is welcome. It is a genuine gap in the market. Speed is also of the essence too. Tardiness by lenders can be extremely frustrating and is illustrative of many banks complete lack of comprehension of the day to day requirements of any business and how these can change. Just last month a deal I was handling was effectively lost because the client was rightly frustrated at the slow responses
This is a serious weakness in the invoice finance market
But where are the weaknesses with some of these online platforms?
Again speed is the issue and there is the flip side of the coin. Fundbox promise to fund within 50 seconds if the data stacks up. Great. Credit ratings on both sides are important but so is the contract. And who is going to read that in 50 seconds? This can lead to serious exposure
Also credit ratings vary enormously and they are going to have to be very sure of their sources. This being in the US, information will not always be easy to obtain too. Data takes analysis and should be the starting point. The risk may be fine for the very small transactions but I can foresee difficulties further down the line with certain higher value items
Lastly there is the cost. These invoices are funded by outside investors and that will not generally be cheaper than a bank. The article skipped over this point to some extent
Only last year Citibanks invoice financing was hit by a large scale fraud which was long term but not particularly sophisticated. I fear that some of the wide eyed new facilities are very open to similar which in the event of a high profile large scale calamity will send investors running possibly putting back the enterprise many years. In fact this has been seen already in the UK
Ultimately cost of borrowing equates to risk. Or maybe we should say perceived risk. To remain competitive in the market the investors confidence has to remain strong. Lets see if they can maintain that
Boom in Asset based lending
This is one of the articles that speaks for itself.
Businesses in the UK received a record high GBP 19.4 billion of funding through asset based finance in Q4 2014.
The increase is of GBP 1.6 billion on the same period a year ago, according to the Asset Based Finance Association (ABFA), the body representing the asset based finance industry in the UK and the Republic of Ireland.
The ABFA says that this jump in the use of invoice finance and asset based lending (borrowing against the value of the businesses other assets) is now primarily driven by businesses funding growth plans rather than replacing their use of traditional term loans or overdrafts.
According to the research, businesses are now using 38 % more asset based finance than at the height of the recession in December 2009, when GBP 14.1 billion was provided.
The ABFA says that the speed at which asset based finance facilities can be agreed or extended makes them an ideal way for businesses to respond quickly to growth opportunities arise as the economy recovers.
Additionally, Jeff Longhurst, Chief Executive of the ABFA explains that there is also another GBP 20.5 billion of unused facilities agreed with businesses which they could drawdown if they required it.
80 % of asset based finance is invoice finance, in which businesses secure funding against their unpaid invoices, while the other 20 % represents the area of asset based lending, in which businesses can raise money secured against a range of other assets they own, including inventory, property and machinery.
Milliband’s problem
This is not a political blog but any aspect of business or finance is inevitably affected by political decisions and with an election looming, future policy is very much on many peoples mind. For many in business, the present Labour leader certainly raises many concerns
Labour is never going to be the natural “party of business” but at the same time, the major political parties do need to reach across divides if they are to win what will be tight contest. Milliband’s continual and almost seemingly obsessive refusal to engage with business on any level strikes me as being either extremely naive or simply driven by dogma
His predecessors, Blair and Brown dropped the word enterprise into every speech at every opportunity and there were various pro business initiatives. Milliband is politically more to the left and it might also be explained that he is from a certain community which is perhaps rather sniffy about “trade”.
No he is no aristocrat but the north London self styled intellectual sect is probably about as disengaged from the average South London car dealer or midlands factory owner as you can get.
Other than that, I cannot find another explanation. There may well be some hostility to big business in the uk but on the whole the country is geared towards enterprise both culturally and politically. The british tend to respect the “self made man” more than we would see in other cultures. The economy is strong and the electorate is well aware that much of this is based on and reflected in the SME sector. Furthermore a very high proportion of the workforce are employed by SMEs and they will naturally be concerned about policy affecting their prospects
Milliband appears to be more concerned with shoring up his support in the Public sector than reaching out and that will not get him elected. Even the hard left Ken Livingstone used to give some remarkably positive and perceptive business friendly speeches. This resonates and Milliband seriously needs to think again
Breakout Nations. A review
Many books written on the economies and nation states “breaking out” from previous economic tribulations and underachievement tend towards either the fawning or the doom laden. Political instinct takes over and titles such as the probably hopeful “When China rules the world” abound, so it is a pleasure to read an wide ranging and yet concise account from a cool eyed investment perspective
This excellent read certainly fits the bill.
https://www.waterstones.com/book/breakout-nations/ruchir-sharma/9780241957813
This being a virtual tour of most of the emerging nations but also touching on the “first world” market, with pithy and sharp observations, there are many interesting and surprising observations. Opinions are not shied away from but the writer always manages to keep a strong sense of perspective by highlighting the negatives in markets where his views are favourable.
There are certain principles which drive his views and they are hard to argue with. The book was written in 2012 so subsequent events can give credence to his opinions and his views that commodities have been overpriced has been born out as is his observation that the US economy will bounce back strongly
Nations heavily reliant of commodities such as Russia and Brazil are strongly criticised and other economies which are bedeviled with “crony capitalism” ( Brazil again, India) are slated to continue to under-perform. Certainly South Korea is held up as a fine example of an economy that has successfully adapted to changing market conditions and will continue to do so. Poland and the Czech republic too but there are many nuances in his sharp observations making this an truly excellent read
Not just for investors but also anyone who is involved with credit in these markets
Paid when Paid. part two, an American view
It would appear that the “paid when paid” clause has been tested across various states in the USA with differing results
This is quoted from a good piece by Hellmuth and Johnson in Minneapolis
Courts are split on whether the pay-when-paid clause is enforceable. The following states have ruled that these clauses (or certain variations of them) are valid, and that they shift the risk of owner nonpayment to the subcontractor: Arizona, Colorado, Georgia, Florida, Illinois, Michigan and Maryland.
>In contrast, California and New York have totally abolished the pay-when-paid clause. In other states, the enforceability of these provisions remains unclear, but the courts have tended to invalidate them. The following states do not appear to have a steadfast rule on the issue, but tend to disfavor them and have previously invalidated pay-when-paid clauses on technical or other grounds: Alabama, Connecticut, Louisiana, Massachusetts, Missouri, Pennsylvania, Tennessee and Washington, D.C. The Federal First and Fourth Circuit Courts of Appeals have also invalidated these types of provisions for various reason
This does date back to 2002 and maybe there have been some subsequent developments. South and North Carolina seemingly take the New York view whereas Virginia does not vary from the precise terms of the contract.
Quite a reminder of the substantial legal variations across different states
Paid when Paid. Be warned
A good client of mine has been hit by the nasty and underhand “paid when paid” clause imposed by an increasing number of clients. The client amended his contract to include “paid when paid” and now inevitably the debtor at the end of the chain has gone into administration leaving my client with a probably £60k loss
My client is generally very shrewd but this is an element of any contract which can easily be overlooked. For two prime reasons it is extremely dangerous.
Firstly you are handing over control of your cashflow to your client. The frustration and stress that can cause will be immense.
More importantly you are also taking on the credit risk without having any control over it. That is frankly complete madness
Invoice financiers refuse to fund “paid when paid” accounts and rightly so. See this article
The whole issue was also a huge problem in the construction industry in the 90s and has now been outlawed. Rightly so in my opinion but why stop at construction? I am all for contracts being based on the basis of buyer beware but i would certainly be in favour of this nasty clause being outlawed across all industry.
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