The business environment

One of the main trends having an impact on the business is regulation. In May 2015 the FCA released the results of a review carried out into the insurance premium finance market. This revealed that insurer and insurance intermediaries have not always provided customers with clear information about different payment options available when buying general insurance products, including providing clear information about the overall cost of paying for insurance, clear information about the payment options available to them and transparency in the role of the intermediary. The board is confident that our documentation and procedures fulfil the requirements of the FCA, as evidenced by Bexhill UK Limited obtaining full FCA permission in July 2015.

In August this year the Bank of England cut its base rate to 0.25%. Many commentators, picking up on remarks by the Governor, seem to think that this is as low as rates are likely to fall given the buoyant nature of the UK economy at present. However, using the same sources, the directors believe that it is unlikely that there will be any rises until well into next year. Even if rates do increase, the nature of the business will allow fairly quick reaction to this. The board believes that further opportunities will present themselves with liquidity being more important to businesses and individuals.

Of course, we have had a referendum on whether to stay in or leave the European Union. The run up to this saw a certain amount of unsteadiness in markets generally. The outcome may bring its own problems in the future but at least businesses know the direction the country is heading.

The business environment has certainly provided some challenges this year but it still affords a real opportunity for the group, with a growing market for its products and relatively stable interest rates.

Principal risks and uncertainties

The group's activities expose it to a variety of financial risks; cash flow interest rate risk, credit risk and liquidity risk. The group's overall risk management programme focuses on reducing the effect of these risks on the group's financial performance. A robust assessment of the principal risks affecting the group has been carried out by the board of directors. It identifies, evaluates and mitigates financial risks and has written policies for credit risk and liquidity risk.

Cash flow interest rate risk

The group borrows money from its bankers which it lends on. The borrowings are repaid each month and new loans taken out to cover lending to customers. Bank borrowings are linked to base rate. If bank rate increases there is therefore a risk that loans already made and which need to be covered will be effectively charged at a lower margin for part of the borrowing term. The board is in regular contact with its bankers and regularly reviews the financial situation in the economy to assist in mitigating this risk. In addition, the loans made are for relatively short terms (no more than twelve months with the average at ten) so any increase is likely to have a fairly short term impact.

Credit risk

The group operates a robust credit system. Money is only lent for periods up to one year, through regulated introducers who are the effective underwriters of any loans. They guarantee the debt of the customer to whom the loan is made. Borrowing limits are set based on financial information, credit reports, regulatory requirements and other qualitative factors obtained from the of the introducer. In addition, an annual review process including regulatory permissions and credit checks is conducted and each introducer is monitored monthly for the company's financial exposure to that introducer. This process has meant that the incidence of bad debt in the last eight years has been nil.

Liquidity risk

Until recently, one of the trading companies making up the subsidiaries had to borrow money at a relatively high rate of interest. Business was available but it was not always able to be taken up because liquidity was constricted. Since the share offer sufficient capital has been made available to enable further borrowing at better rates leading to the ability to lend more. The risk of insufficient liquidity has therefore been mitigated.

IT systems risk

A further risk identified by the board is that our operations are dependent on IT systems, which could potentially suffer significant disruptions or even failure. The directors, therefore, have in place business continuity procedures and security measures in the event of IT failures or disruption, including backup IT systems for business critical systems.

In summary, cash flow interest rate risk is mitigated by the fact that loans are short term and by regular interaction with our bankers; credit risk is reduced by a robust system of checks on borrowers and by third party guarantees; liquidity risk has been alleviated by the injection of capital, allowing the group to be less reliant on borrowings and enabling it to obtain better borrowing terms; and risk from disruption of the IT system is avoided by thorough continuity procedures.

Our internal control systems ensure that the incidence of fraud or error is kept to a minimum. Much of the process is automated and provided and maintained by a third party.

Development and performance of the business

The fundamental function of the business (whether the insurance side or fee funding side) is to lend money. To do this the group relies on obtaining funding to provide loans to clients of its partners (insurance intermediaries and professional firms). The ability to provide this money is crucial to the business. As a result of the IPO in 2015, liquidity has not been an issue this year. Nonetheless, availability of funds is a key area for future growth.

The ability to find borrowers is also key to the business. There has been no shortage of good quality lending opportunities up to now. At the beginning of the financial year, the directors launched a more formal and extensive marketing plan. In summary the plan encompassed the expansion of the sales team, a focused marketing drive to help increase awareness of the group in the market and an increase in regular electronic and telesales contact with existing and new customers in both our markets. Unfortunately, the benefits which should have flowed from this have been delayed for several reasons, including delays by the FCA in approving brokers and other intermediaries who offer financial services, and finding key personnel. Things are moving a little quicker at the FCA and recent recruits are already contributing substantially to the growth on the group.

Our margin is another key area. Upward changes in base rate could erode our margins. The board reviews this on a monthly basis and liaises with its bankers. Should rates increase, our rates would also increase to reflect this. Our own analysis indicates that the influence on our business would be negligible. Indeed, we have just seen a reduction in rates which has had very little impact.

Overheads in this business are relatively stable. Apart from the increases resulting from becoming a listed company, and those associated with an increased sales function, these should not alter significantly.

The board have identified the following financial key performance indicators (KPIs):

Lending

Margins

The table below gives a breakdown of our KPIs by subsidiary.

In terms of non-financial indicators, the most important of these is quality of management and staff.

Our three senior members of staff have 28 years between them working in the business. They have taken on additional responsibilities over the years to the extent that they know each area of the business. 

All our staff are fully trained for the role which they take. Customer care is of paramount importance in our business culture and this aspect is a constant part of staff training for all staff. Feedback from our partners in this area has been very positive. Performance targets set for our staff have all been met.

People are happy to contribute towards our success and their views are always listened to by senior management. In many cases ideas which come forward are put into action and in all cases explanations are given when this does not happen.

Going concern

The directors continually assess the prospects of the group. Forecasts are prepared for a five year period, on a rolling basis. These are also subject to sensitivity analysis, the main aspect of which is the value of loans made. In all scenarios, there is no indication that there will be a problem in continuing as a going concern. However, it is important to appreciate that the further away (in time) the estimate, the less reliable it is. The forecasts are prepared on the basis that bank base rate will remain where it is. This is clearly highly unlikely in the longer term. However, should rates from the bank rise we are in a position to react (as mentioned in the section on cash flow interest rate risk on page 5 in the statutory accounts), within a short period of time, with relatively little impact on our margins.

The key assumptions and bases used in the forecasts are:

·    Funding provided will grow from circa £50m in 2016 to circa £120m in 2020;

·    Liquidity will be available to fund those loans;

·    Margins will remain stable on corporate business and will increase slightly on direct business;

·    Overhead will increase at the rate of inflation with stepped increases at certain points (when capacity constraints are hit);

·    The funding system will be able to accommodate the increased business.

The consolidated statement of financial position on page 16 of the statutory accounts shows the situation at the period end in detail.

 The two subsidiaries have traded for a number of years and have grown at a rate commensurate with finance available at a given point in time and within other recent constraints (e.g. delays by the FCA).

The financial statements have been prepared on a going concern basis which assumes that the group will be able to continue its operations for the foreseeable future.

The directors have prepared and reviewed financial projections for the 12 month period from the date of signing of these financial statements. Based on the level of existing cash and the projected income and expenditure, the directors have a reasonable expectation that the company and group have adequate resources to continue in business for the foreseeable future. Accordingly the going concern basis has been used in preparing the financial statements.

Environmental, social responsibility, community and human rights issues

The group is a small group. It does not manufacture or need physical distribution channels. The impact of the group on the environment consists of power used in an office environment and fuel used for getting to and from work. Environmental issues are therefore negligible.

The group operates out of an office in Luton. Most of our employees are based in the local area. We therefore contribute to the economy of the community. We are an ethical employer and believe in paying well for good performance. None of our employees earn less than £10 per hour (before any bonuses). We provide health club membership for any staff who wish it. We review the background of our suppliers and will not use any supplier which breaches our own high standards as regards human rights.

Gender diversity

The main board of directors is currently all male. The main reason for this situation is taking in outside board members who were best suited to the positions. The board of the two subsidiaries consist of one male and two females each.

Males make up 36% of the employees in total (30% in 2015).