Invoice finance, or factoring, is considered by some to be the pay-day lending of the business world; others see it as a key tool for small business to maintain cashflow. Subcontractors often use it as a stop-gap when tier one contractors prove slow to pay them, to keep their heads above water.
More than 44,000 businesses receive more than £19bn of funding this way at any one time, according to the Asset Based Finance Association, which represents the factoring industry in the UK. But the size of the market is limited by clauses designed to prevent a supplier from subcontracting work. These clauses have the unintentional consequence of blocking invoice finance arrangements and will be nullified, while retaining a customer’s right to prevent traditional subcontracting arrangements.
The Department for Business & Innovation said that removing these restrictions will open up more funding opportunities. The new measures come into force early next year.
Small business minister Anna Soubry said: “Small businesses are the economic backbone of Britain and we will do everything possible to make sure they continue to grow and create jobs. By scrapping restrictions on invoice finance, thousands of firms across the country could benefit from faster access to hard-fought funds.
“While invoice finance may not be right for everyone and is absolutely no excuse for late payment, I want small businesses to have the option of using it to increase their cashflow. This is all part of our plan to maintain the UK’s position as the best place in Europe to start and grow a business.”
Asset Based Finance Association chief executive Jeff Longhurst said: “This is good news for UK businesses. As government recognises, invoice finance is a key source of funding for SMEs in particular, and taking effective action against bans on the assignment of invoices will allow more businesses to unlock the funding tied up in their unpaid invoices.
“Bans on assignment are often imposed by large companies on their smaller suppliers. With the work being done on late payment and now on ban on assignment, government has shown it is committed to addressing poor payment practices and getting a fairer deal for smaller businesses. It is a complex area and we look forward to seeing the detailed regulations, but the government must be congratulated for the focus on this important area.”
John Allan, national chairman of the Federation of Small Businesses, said: “The decision to outlaw the ban on terms in contracts to prevent businesses from choosing who they want to go to for invoice financing is overwhelmingly positive for businesses around the country. It’s something the FSB has been calling for and will empower businesses to take more control over their finances. Access to finance can be very challenging for small firms. Recent FSB research shows that 38% of our members who applied for finance were refused in the second quarter of this year.
“As the change will start when the rules come into force, it is important that small businesses have clarity around exactly which types of contracts will be affected.
The Small Business, Enterprise and Employment Act 2015 allows the secretary of state for business to introduce these measures, which received cross-party support during the passage of the Act through Parliament. A similar ban is in effect in the USA, Canada and Australia.