Press Coverage: Rail Professional – A new line in rail finance

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Getting a major order to supply a rail company with goods or services can either make a supplying company or break it if it does not get the financing right.

Landing a contract from a rail company is usually the cause for at least a celebratory drink down the pub, as the orders are usually big; either because of the numbers involved or the physical size of the plant and construction. It is only when financing the order is considered that the headaches begin. The gap in time between paying out for materials, components and wages, and receiving payment can be a long one with no money coming in.

As a crowdlending company we have been looking at the financing of companies selling to the rail industry in some detail, and it is one full of pitfalls for the unwary; especially if factoring or invoice discounting is used.

For this reason we are launching a major drive to help rail industry suppliers in the same way we have helped companies across a wide range of industries, including transport, construction, export, service and many others.

It is estimated that £36bn is being invested in the UK railway sector at the moment, excluding HS2 and CrossRail 2, which, in theory, is good for supplier companies. The problem is getting hold of that all-important working capital without personal guarantees, third parties coming between you and your customers or over-inflated costs.

At a time when the banks are turning off the taps and other lenders impose restrictions, ArchOver aims to be an active contributor to the rejuvenation of the UK economy by being better on price, process and planning. Which, in simple terms, means we aim to be more competitive than other lenders, to keep the admin to a necessary minimum and allow companies to plan with more certainty. With factoring or invoice discounting, the amount of money available from month to month can be very uncertain, while, with the ArchOver platform of a fixed term loan, businesses always know exactly what they have available.

One company we have been talking to is Wilcomatic, a division of which specialises in the supply and installation of automatic wash equipment to rail, tram, monorail and APT systems throughout the world.

The equipment Wilcomatic supplies is manufactured in Germany and can be installed as far afield as Blackpool and Kuala Lumpur. It has to pay for the wash systems before they leave Germany, so it can be a long time before these large pieces of equipment are fully installed and signed off by the customer.

Wilcomatic currently tackles this problem through a combination of staged payments and invoice discounting.

Says Wilcomatic chairman Selwyn Rodrigues: “The first payment is usually for 15-25% of the value of the contract at the time the customer accepts the drawings, and then a further 40-50% following the completion of a successful factory inspection. That can be a rigorous process, involving the manufacturer and us showing the customer the whole manufacturing process and supplying them with a lot of detailed information.

“Most of the rest is paid on completion of the contract, with a small amount retained for payment after the customer’s staff has been trained and it can verify it is performing as it should. Obviously this can only be done when trains can be run through the systems, and on new lines, or in new depots, this can sometimes be months after we have finished the installation.”

The stages are, of course, only when the part payment becomes due, so an invoice can be issued which actually get paid 30-60 days later.

“Depending on the circumstances,” says Selwyn Rodrigues, “we sometimes use invoice discounting, which allows us to get 85% of the invoice value straight away and the rest when the invoice is paid. Obviously we have to pay a fee for the facility.

“On the whole this works well, but the finance only stays in place for 121 days, so, if for some reason, the customer doesn’t pay by then, the facility is withdrawn. This is one of the reasons we are currently looking at alternative finance.”

However, not everyone has such a positive experience.

We also talked to a former director of a Midlands manufacturer who wanted to remain anonymous. His company supplied such things as doors, luggage racks and dashboards for railways and metros.

“One of the big problems with supplying doors for trains,” he said. “is that they are usually large orders, but seldom repeat business and it can sometimes take up to five months before the bill is paid.”

To bridge the gap, the company used the factoring services of a High Street bank. Like invoice discounting, around 80% of the invoice value is paid by the factoring company when it is raised, but it then becomes the property of the factor, which keeps the remaining 15%.

“Our rail business was very profitable,” said the manufacturer, “but fell apart because of factoring.

“We could supply 400 doors to London Underground, but if one of them was scratched, the customer wouldn’t pay for any of the doors until it had the complete batch. Because the invoice was not being paid, the factor would snatch back the money advanced, which would leave us with serious solvency problems.

“In addition, an aggressive girl from the factor would sometimes chase our customers for payment, seriously damaging our relationship with them.

“If there is a strike at a supplier or a customer, which is going to delay delivery or payment, you can lose all the advanced money for no fault of your own.

“It’s not just rail, of course. I have been involved in many engineering sectors and the problems with factoring are common to each. There is also the requirement with many forms of bank backed financing for the directors to give personal guarantees, which can put one’s family home and other assets at risk.

“If I had known about the ArchOver crowdlending platform back then it could have saved my business. If you need £½m, you get the money for a fixed term of up to two years and nobody tries to snatch it back.”

Crowdlending, or peer to peer lending, is an alternative form of finance, which allows those with money to invest to lend it directly to those who need it, without the involvement of banks, invoice discounters or factors.

Briefly, ArchOver uses money from its investors and lends directly to borrowers. This allows investors to diversify their investment portfolio across multiple projects therefore minimising the investment risk. Each borrower is funded by numerous investors, which each risk a comparatively small amount.

To increase security, ArchOver, on behalf of its lenders, takes a first floating charge over the trade debtors and the borrower takes out credit insurance with ArchOver jointly insured. This leaves the rest of the balance sheet free, so borrowers can access other forms of finance should they need it. It also does not demand dreaded personal guarantees.

This system provides a higher interest rate for investors than they could get elsewhere, and provides borrowers with lower cost finance with fewer restrictions than elsewhere.

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