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New laws will make it easier for small businesses
to access invoice finance, providing a £1bn long-term
boost to the economy
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The new laws form part of the government’s modern
Industrial Strategy, building an environment in which
small businesses can thrive
Small Business Minister will today (Monday 10
September) put forward new laws to arm small businesses
against unfair contracts that stop them raising money from
unpaid invoices.
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 31 December 2018, with
certain exceptions, would have no effect and could be
disregarded by small businesses and finance providers,
which will help stop larger businesses from abusing their
market position.
The new measures are expected to provide a long-term boost
to the UK economy estimated to be worth almost £1bn.
Small Business Minister 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.
The proposed laws come as a number of larger businesses
stop their suppliers from assigning ‘receivables’ – the
right to receive the proceeds from an invoice. This
assignment is essential for invoice finance to operate.
Restrictive contract terms are often used by larger
businesses to maintain a hold over their suppliers, with
small suppliers often unable to negotiate changes to the
proposed contract because they do not have enough power in
the marketplace.
Notes to editors
- The legal changes are set out in the draft ‘Business
Contract Terms (Assignment of Receivables) Regulations
2018’.
- The estimated current value of the stock of invoice
finance to SMEs is approximately £9.5 billion.
- Restrictions on invoice finance for SMES in contracts
agreed on or after 31 December 2018 will simply not have
any legal effect in this way, so the changes introduced by
the government involve no compliance or reporting burden to
businesses. Contracts can be expected to evolve over time
to reflect the regulations.
- 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.
- 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.
