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Mon September 27 2021

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SMEs to get safeguards on access to invoice finance

10 Sep 18 Proposed legislation is being introduced to Parliament to end restrictions on invoice finance in business contracts.

The move is designed to make it easier for small businesses to access finance and is part of the government’s industrial strategy.

Currently a small supplier’s contract with a larger company may prevent it from securing invoice finance from providers such as banks and other investors.

Under the new proposed laws, any such contractual restrictions entered into after 31st December 2018, with certain exceptions, would have no effect and could be disregarded by small businesses and finance providers,

Invoice finance allows a business to raise funds by assigning their right to be paid (known as ‘receivables’) to a finance provider in exchange for funds, typically representing 80% of the value of the invoices. The initial advance is received within a few days and the balancing 20% (less fees and charges) is paid when the customer settles the invoice. Invoice finance is not borrowing, because the supplier is receiving an advance against a future payment. Some purchase contracts include terms that prohibit assignment, which prevents (or inhibits) access to invoice finance. Suppliers sometimes accept these contracts because of their weak negotiating position. It is these contract terms that the regulations will address.

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The regulations would apply to SME suppliers and contain exceptions for certain types of contract, such as contracts for financial services, contracts with consumers and contracts connected with the sale of a business.

The legal changes are set out in the draft Business Contract Terms (Assignment of Receivables) Regulations 2018.

Small business minister Kelly Tolhurst said: “The UK’s 5.7 million small businesses are the backbone of our economy and central to our modern industrial strategy, with more than 1,000 starting up every day. These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply.”

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