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The Brumark case explained

Brumark Investments ­ a name few of us had encountered this time last year, but one which is becoming increasingly significant, even crucial, for the business community, particularly SMEs. Yet the number of company owners that have investigated the implications of a Privy Council ruling on Brumark is small, and the percentage of those who understand the ruling is even smaller.

In a nutshell, the ruling has barred the clearing banks from automatically claiming funds from unpaid sales invoices should one of its customers go down. Until now banks have secured their overdrafts to business customers with security provided from a combination of house, directors' guarantees and also a "floating charge" on outstanding sales invoices that became a fixed charge in the event of a failure.

The bank therefore became a preferential creditor with front-of-the-queue access to whatever funds were available; in fact, because the funds were paid into a bank account that it could block, it had total control of any removal of funds. It always had the ability to get its money back before anybody else.

Under the Brumark decision, the only manner in which sales invoices can be declared a fixed charge is if the lender ­ the bank - has been in full control of the invoice AND ITS COLLECTION throughout. This is clearly not possible where companies administer their own sales ledgers, so the ruling hits the banks badly ­ and they are not happy about the situation.

Not surprisingly they are attempting to address the problem, in fact they are now, rather belatedly, getting their act together - and this is where customers with overdrafts are going to be most affected.

Because factoring and invoice discounting gives control of the sales invoices by means of the built-in cash collection service that comes with this method of company funding, it fully meets the obligations contained within the Brumark ruling.
Surprise, surprise, the clearing banks are now informing their customers that as there is no longer enough security in place to cover their overdraft and they are therefore requiting additional tangible security, or a reduction in the overdraft limits or alternatively taking advantage of the clearing banks' own in-house providers of factoring and discounting facilities.

May I suggest that the old adage of "all eggs in one basket being a dangerous thing" is most apt in this situation and I urge all clearing bank customers, when they are informed of the new developments, to look elsewhere for their funding.
Don't be forced down the banks' factoring route

The Brumark decision may appear just a bit of legal mechanism, but in fact it is much more than that. I probably don't have to remind businessmen of the Competition Commission Report concerning the practices of the main clearers to the detriment of their customers. Independents such as Close Invoice Finance are able to provide an alternative that not only offers funds, but also personal service and a financial partnership to help entrepreneurs to grow their businesses.

Generally businessmen don't know (and don't particularly want to know) how banks put together their security, but the Brumark ruling has revealed just how much they have relied, in the past, on a fixed charge on the sales invoices. Things have to change and I, for one, don't want the SME sector to suffer as a result.



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