Insolvency solution

The letter came a week after Peter Pratt's bank manager assured him his credit line was solid.

The October 31 note from HSBC Holdings Plc ordered PP Engineering Ltd, the company Pratt founded in 1999, to repay 120,000 pounds ($184,000) in loans and overdraft by the end of January. It also increased the interest rate.

"I thought we were going to be closed," Pratt, 50, says from his office in Bristol, England. "I was shocked. Our bills have always been paid."

Pratt's accountant brokered a deal in the end with Ultimate Finance Group Plc, which extended an invoice-backed loan to the seven-person company. As a third of Britain's 4.7 million smaller businesses struggle to get credit, many are seeking insolvency advice, fueling a boom in UK corporate recovery. Begbies Traynor Plc, which helped Wrexham FC soccer club avoid bankruptcy, and Tenon Group Plc are hiring to cope with demand.

"Mainstream lending has evaporated and these companies can do more due diligence in terms of lending to small businesses," says Tom Mills, a Manchester-based analyst at Daniel Stewart & Co. "Recovery services they provide are worth more than they were in the past."

At the end of June, invoice discounters such as Manchester- based Ultimate, which get most of their work from corporate recovery firms including Tenon and Begbies, have advanced 17.3 billion pounds to more than 48,000 UK businesses, according to Asset Based Finance Association. That's an increase of 15 percent in value from a year earlier.

Factoring

Also known as factoring, invoice discounting had its heyday in the New York City garment industry of the 1960s. In the US version, companies sell their order books at a discount, while in Europe it's more common to obtain loans backed by incoming receipts. Used most often by companies going through growth spurts, it's now attracting those that need quick funds when their financing falls through.

"It's an option of last resort, but sometimes it's the only option," says Nick Pollington, a partner at accounting firm Price Bailey in Ely, England.

While interest rates are usually in line with standard bank rates, the client also pays monthly service fees and charges for the amounts drawn on the loan, making it an expensive option. In a deal Pollington arranged six months ago, the costs added up to about 13 percent of the borrowings.

Traditional lenders such as Lloyds TSB Group Plc and HSBC also have invoice financing arms.

Rising insolvencies

Insolvencies in England and Wales rose 26 percent in the third quarter, with over 4,000 companies having gone bust, the UK Office of National Statistics said. About 40 percent of small businesses are considering shutting down, according to a survey by the Federation of Small Businesses in Blackpool, England.

About 13.5 million people, or 58 percent of the UK's private sector workforce, are employed at companies with fewer than 50 people.

"We have gone from one extreme to another," says Ric Traynor, CEO of Manchester-based Begbies Traynor. Begbies has added four offices this year and will have expanded its 600- person workforce by 20 percent by April, he says. "There is no credit available where it should be."

Tenon, a London-based financial consulting firm, and Ultimate Finance are also hiring. Vantis Plc, the administrator for UK fashion house Miss Sixty, has shifted employees from its corporate finance division into business recovery.

By 2009, about 25 percent of Tenon's revenue will come from turnaround and corporate recovery work, compared with 19 percent this year, Charles Stanley & Co's London-based analyst Ben Archer said. A similar increase is expected at Vantis, he said.

Shares rise

Begbies has surged 31 percent in London trading this year, compared with a 63 percent slump of the Alternative Investment Market All-Share Index. The stock last traded at 132 pence. Tenon dropped 3 percent to 41 pence.

All four analysts who have covered Tenon in the past year recommend buying the stock, predicting an 88 percent jump to 77 pence, on average, in the next 12 months.

Small businesses are also turning to the government to stay afloat. Prime Minister Gordon Brown has urged banks to revive the flow of credit through the economy.

In Essex, the county on London's northeast border, the local council is planning to start its own bank, modeled on US regional lenders.

State aid

"We've had more and more small businesses that aren't able to access funds at the moment," says Essex council leader Lord Hanningfield. "They're very viable companies with good long-term prospects."

In October, Tenon announced plans to set up a distressed capital fund to invest in clients with growth potential.

HBOS Plc the UK bank being bought by Lloyds TSB, plans to use 250 million pounds from the European Investment Bank to offer discounted loans to small and medium-sized companies, it said this month. HSBC, Europe's biggest bank, said December 7 it created a $5 billion fund for smaller businesses.

"We are trying to help companies through, but there will be cases that won't survive," says HSBC spokesman Mark Hemingway in London. HSBC doesn't comment on specific customers, he adds.

"The world's just got stupid," said Steve Barlow, owner of Calder Colours Ashby Ltd, a UK arts and crafts company that went into administration in August after a retail client went bust. Calder emerged through a management buyout at the end of September, after following insolvency advice provided by Vantis and an invoice-based loan from Cattles Plc.

"It's been like running a race with someone pulling your shirt," Barlow says.

Agencies

(China Daily 12/22/2008 page11)