The financial crisis shaped and changed the business world more than any other event in recent times.
For many, the defining moment was when Lehman Brothers filed for Chapter 11 Bankruptcy protection in September 2008 after announcing losses of $3.9bn.
In the aftermath of Lehman’s collapse, money market interest rates rose sharply and there was a virtual freeze in inter-bank lending due to fears that more banks would be allowed to fail, as the UK experienced with the run on Northern Rock the year before.
A principal source of funding for loans to businesses and individuals was no longer available.
SME’s were directly affected.
The SME Problem
These small businesses, more than any other, relied on bank debt including overdrafts and loans for their external financing needs and were particularly at risk from a collapse in bank lending. Indeed, the available evidence from 2008 suggests that small businesses were not only finding it increasingly difficult to obtain finance, but were dealing with the withdrawal of promised finance, experiencing sharp increases in loan interest rates and were having facility fees imposed. Even firms with good credit histories were not immune to these problems. Banks became more risk averse and small business owners were being offered smaller loans, as falling house prices meant they had reduced collateral.
More than 10 years on, a group of financial professionals who were all affected, yet survived the financial crisis, have joined together to create a reputable and experienced board at Clear Factor. Clear Factor is a community-driven global invoice finance ecosystem that will address a £2 trillion marketplace full of small businesses which are still being denied finance today.
The Clear Factor board all have stories to tell, but none more so than the Clear Factor chairman, Ricky Shankar. Shankar launched his then software services firm Amsphere, in 2002 to help FTSE 100 businesses reduce their risk of business change, particularly in IT.
Like many entrepreneurs getting started, Shankar had put up his home as collateral with a high street bank – HBOS.
Amsphere grew quickly and exponentially, posting 100% growth in revenue and profits in its infant years. Clients settled their invoices well within the 30 days agreement. Times were good.
Three years later, in 2005, Amsphere continued to expand and subsequently, payment terms lengthened. Yet, despite being profitable, cash flow was becoming an issue and Amsphere required access to working capital in order to pay the monthly bills.
Shankar looked in to invoice financing and within a few weeks agreed an invoice finance facility with HBOS. In short, Amsphere was able to draw down 85% of all invoices raised immediately. Their cash flow problems were solved at a stroke.
The next three years saw Amsphere’s trajectory further rise, peaking in 2008 when the firm was named in The Sunday Times fastest growing Techtrack companies in the UK. HBOS publicised Amsphere’s accolades and were quick to also take credit.
It all changed in 2009.
As a direct result of the financial crisis, HBOS was taken over by Lloyds and they merged to become Lloyds Banking Group, the largest retail bank in the UK.
The following year, Lloyds recalibrated its risk assessment and Amsphere was now deemed ‘high risk’ despite being a reliable client and posting no bad debts. In no uncertain terms, Amsphere was given six months to find a new invoice finance lender.
Shankar quickly sought an alternative arrangement with Bibby Financial Services and a deal was signed. However, three days before the transfer between banks, Bibby pulled out of the deal, asking for directors’ homes as collateral. Amsphere, now struggling as many SME’s were in the recession, still remained profitable but was three days away from collapse.
Shankar contacted Simon Featherstone, who at the time was Managing Director of Lloyds Commercial Finance. A meeting with Lloyds was arranged whereby it was explained how the failings of banks would in effect be putting a perfectly profitable and fast growing UK SME out of business.
Shankar and the substantial reputational clout of Featherstone convinced Lloyds to take back Amsphere as a client. Ironically, Featherstone was appointed as global CEO of Bibby two years later.
Whilst Shankar’s predicament had a happy ending, thousands of other profitable businesses were not so fortunate. According to data from the Federation of Small Businesses, 50,000 small businesses fail each year due to cash flow issues. Shankar’s story is a sobering demonstration of how the banks failures in 2007 and 2008 directly impacted the lifeblood of the UK’s enterprise sector, the SME’s.
The Alternative Finance Marketplace is changing
Shankar learnt an important lesson. Banks which provide working capital finance to any business, especially an SME, are able to decide the fate of that business as and when they chose. It does not matter how profitable the SME is, it is purely based on the risk an SME poses on the balance sheet of a large bank.
“SME’s and large banks are simply bad bedfellows,” commented Shankar.
“After my experience, I saw the opportunity for the invoice financing sector to grow away from the banks. There are almost six million small businesses in Britain today. Of those, less than one per cent are funded by high street banks! Something needed to be created, and the idea of Clear Factor was spawned,” added Shankar.
“SME’s today have very few choices for working capital. Low borrowing rates no longer exist as interest rates range from 12% to 100% per annum for SME loans via the alternative finance lenders. Most lenders require director guarantees, additional collateral and debentures on the business. SME invoice finance for most of the business community still remains at a very nascent stage of development. That is why we have launched Clear Factor to change the playing field forever.”
Clear Factor’s mission
Clear Factor is positioning itself as a transparent, borderless and democratised global invoice-finance ecosystem, the like which has never been seen before. With a simple mission. To help small businesses access finance without punitive interest rates.
Utilising blockchain, smart contracts and through a unique auction system, Clear Factor will give every viable SME anywhere on the planet, in any currency, access to the affordable working capital they need to grow. The fair interest rate will be determined by the auction and agreed to by the SME.
During the invoice auction, the interest rate is agreed via smart contract mutual consensus. Investors invest in different interest-rate pots. The pot that fills up the earliest is offered to the SME. If the SME rejects the offer, the auction begins again.
All invoices are assessed twice – first by Clear Factor by entering into a legally binding contract with the debtor and latterly by an underwriter in the debtor’s country of residence.
As it is on the blockchain, all auction consensus details will be immutable and searchable to prevent fraud and the multiple selling of the same invoice across different platforms.
“We are focussing on micro and small segments of the SME market – those that are not currently serviced by banks for invoice finance. There are no lock-ins, impositions, hidden costs or contractual binds and there will always be a quick payment against the invoice. The only fee is the ecosystem fee which is 1.0% of the withdrawal amount taken and this applies to the SME, individual investor and trade investor,” summarised Shankar.
In addition to his role as Chairman of Clear Factor, Shankar is also Chairman of their partner firm, Decimal Factor. Clear Factor has been built on Decimal Factor’s existing and robust 10-year-old UK-based lending-brokerage platform, which has data on almost 700,000 UK SMEs and has obtained funding for 1,500 of them. Decimal Factor was founded in 2008 to help UK SMEs fund working capital requirements and is Financial Conduct Authority authorised. Partner lenders include Liberis, Funding Circle, Lloyds Banking Group, IWOCA, Fleximise and Boost Capital.
Clear Factor’s R&D firm Electi Consulting specialise in decentralised protocols, cryptography, cybersecurity, machine-learning and data science. It partners R3, Corda and University College of London Centre for Blockchain Technology.
A £2 trillion marketplace
The service, the team and its affiliate partners are set to not only tap in to but disrupt an existing £2 trillion marketplace.
“In the spirit of blockchain, we are truly borderless and providing a platform for small businesses to give them a fighting chance. If Clear Factor would have existed as an alternative finance option back then, it would have saved hundreds of thousands of businesses from going under.”