Proposed Invoice Finance Reforms Will Give Small Businesses Greater Access to Finance

Small Business Minister Kelly Tolhurst proposed new laws to Parliament last month, with the objective of protecting small businesses from unfair contracts with large companies that prevented them from raising crucial funds using invoice finance (factoring and invoice discounting).

Since the financial crisis, growing businesses have faced a multitude of barriers to accessing traditional loans from high street banks, with flexible alternatives such as invoice finance plugging the funding gap to become a major source of working capital for small businesses across the UK.

Under the new laws proposed by Ms Tolhurst, small businesses will be able to ignore unfair contracts entered into after 31 December 2018 that unfairly stop them from raising cash using their unpaid invoices.

Government Strategy

The move is a major step in the Government’s Modern Industrial Strategy, which was unveiled last year and aims “to deliver a high-skilled, competitive economy that benefits people throughout the UK and make it easier for them to access the capital that they need to grow and thrive”.

It also states: “We will support businesses and entrepreneurs across the UK to ensure they can access finance and wider support to grow, and have the right conditions for companies to invest long term.”

The Modern Industrial Strategy consists of ten pillars; one of which is “supporting businesses to start and grow” and it’s estimated that Kelly Tolhurst’s legal reforms will result in a £1bn boost for the UK economy.

Law Reforms

Under the legal reforms, which are set out in the draft “Business Contract Terms (Assignment of Receivables) Regulations 2018”, purchase contracts entered into after 31 December 2018 that prohibit “the assignment of receivables”, which in short prevents businesses from accessing invoice finance, can be disregarded or ignored. This will make it easier for small businesses to ease their cash flow problems, fund expansion plans and tackle late payment from customers by securing crucial funds using their unpaid invoices.

In addition to the £1bn boost to the economy, the Government claims that the legal reforms will prevent larger companies from abusing their market position and strengthen the hand of smaller businesses who maintain a weaker negotiating position. It’s also estimated that the changes could unlock up to £9.5bn worth of invoice finance for small suppliers.

Mike Smith, MD of Business Expert, said: “SMEs frequently face a tough time when they try to access finance through traditional lenders, and the proposals are a positive development. As of 1 January 2019, more businesses entering into new contracts with larger businesses will be able to secure invoice finance as a result of the reforms, which will provide the lifeblood that small businesses need to grow and thrive within the SME sector, which in turn will boost UK economic growth.”

He added: “Invoice finance is an important source of working capital that should be available to all companies irrespective of their size and it’s good to see the Government finally taking positive action.”

What Is Invoice Finance?

Invoice finance allows businesses to raise funds by assigning their right to be paid (known as ‘receivables’) to an invoice finance provider in exchange for funds, typically representing up to 100% of the value of the unpaid invoices. The initial advance is received within a few days and the balance (minus fees and service charge) is paid when the customer settles the invoice. Invoice finance isn’t a loan as the business is receiving an advance against a future payment.

The Exceptions

Under the new proposals, any restrictive contracts entered into after 31 December 2018, with certain exceptions, will have no effect and should be ignored by small businesses and invoice finance providers alike. The legal reforms apply to SME suppliers; however, there are some exceptions for certain types of contract, such as:

• contracts for financial services,
• contracts for consumers,
• contracts connected with the sale of a business.