Invoice Clearing House (ICH)

In December 2013, I came across an article telling us about the 100th Anniversary of the Federal Reserve of America. The point about it that interested me was that it started as a simple "Clearing House" for banks and increased in importance and functionality until it became the most powerful organisation in the world.

This gave me an idea how to help cash-strapped businesses particularly small and medium-sized Enterprises (SMEs). The idea was to set up a government sponsored "Invoice Clearing House" where SMEs can sell their invoices to the clearing house for a fee and get 90% of the total amount of their invoices and get the rest minus the fee later when the invoices are finally paid.

For Example, suppose we have 4 companies:

1. company A is the raw material supplier whose costs are £1000 and profit is £1000. He sells them to B for £2000.
2. company B is the manufacturer who spends £1000 shaping the raw materials into the finished product and wants £1000 profit. He sells them to C for £4000.
3. company C is the Distributor who simply distributes them to D for £1000 profit i.e. he sells them for £5000.
4. company D is the retailer who sells them to the consumer for £6000 i.e. £1000 profit.

Now company A can get £1800 straight away from the ICH using a service similar to factoring or invoice discounting without the complexities or stringent rules that exclude too many SMEs. Because the ICH has already paid £1800 to A, they only pay B £1800 i.e. 90% of the £1000 cost and £1000 profit. C only gets £900 i.e. 90% of the £1000 profit. This means that the ICH would've paid the companies £4500 in advance and owes them £500 minus fees.

When the retailer D sells the final product to the consumer for £6000, he retains his profit of £1000 and pays the ICH the remaining £5000. The ICH then keeps the £4500 and redistributes the £500 less the fees. Suppose the fees were 3% of £4500 = £135 leaving £365 to be redistributed on a pro-rata basis i.e. £146 + £146 + £73.

With the Invoice Clearing House being in Government hands, they'll keep an eye on what's going on in industry who have been trusted for too long and who didn't return that trust. But the important thing about this is that it keeps the money running smoothly in the economy i.e. it increases liquidity where it matters most unlike Quantitative Easing which provides liquidity to pay for the gambling debts of the people who caused the problem in the first place.

Today, 12/02/14, I read a blog in the smallbusiness.co.uk website which was published 3 weeks ago on 22/01/14:

"The government is, perhaps, best placed to dramatically alter the landscape and help change this mindset. By establishing a funding ‘clearing house’, possibly using the interface of the much-promoted and soon-to-be-launched business bank, the government can signpost suitable alternative lenders which, in turn would generate positive pressure on the main banks to help find funding alternatives for businesses."

My only regret is that I didn't publish my idea before this blog appeared but I do have it handwritten before Christmas but it wasn't dated. At least I'm confident that the powers that be are taking my advice. I mean:

1.  I recall in 2009 advising the then Government to mount a mortgage rescue scheme. Then a couple of weeks later, I read an article where the Nationwide was rescuing its mortgagees using such a scheme. I remember thinking that it's being done anyway. I didn't stop to think that they may have been following my idea.
2. In 2009 I forecasted that the repossession rate would be 50K and set about achieving it - using the mortgage rescue schemes; advising County Court Judges not to entertain repossession petitions until such measures have been taken; and advising Employers that your employees are your best assets, don't lay them off willy nilly. These measures helped us achieve such a difficult target
3. This was repeated in 2010 where we reduced the already low number of repossessions even further to 36.4K
4. We failed to repeat this in 2011 because of the Austerity Measures and I had to concentrate on stabilising the economy. I advised the Chancellor to bring forward the 1% corporation tax cut from 2014 to 2011 because 2011 will bear the brunt of the Austerity Measures and by 2014 the economy will be on a firmer footing that it won't need one. Look at what's happening now in 2014. In the end, there were exactly 36K repossessions in 2011.
5. And now, the "Clearing House" idea. In fact I've alluded to this in 2010. You only need to read my past blogs to find a similar idea in all but name.
6. Incidentally, now that the reduction of repossessions has continued - it's forecast to fall below 30K in 2013 - the next target is 9K in 5 years and less than 1000 after that. Impossible? It will be if you keep thinking like that.

Today (12/02/14) I had two shocks: the fact that the Chancellor actually followed my advice i.e. he did reduce corporation tax by 2% in the March 2011 budget. And the Clearing House idea which I penned out only in December 2013.

These give me the impression that I'm in a position to influence the movers and shakers.

The question is, will we achieve a GDP target of 3% in 2014?