Firms advised to consider changes under new legislation

Posted on 5 May 2015 by The Manufacturer

The Small Business Enterprise and Employment Act (SBA) received Royal Assent on March 26 and introduces wide-reaching measures, designed to open up opportunities for SMEs. Nicole Livesey, a partner at Pinsent Masons LLP, explores one of the key aims of the new legislation – improved access to finance – and how some of the corresponding provisions will impact UK manufacturers, going forward.

Nicole Livesey, partner, Pinsent Masons LLP
Nicole Livesey, partner, Pinsent Masons LLP.

Speedier payments, improved links with alternative lenders and increased transparency – just a few of the ways in which UK SMEs should experience better access to finance under the SBA.

But while the provisions are driven towards smaller and medium sized businesses, their extensiveness inevitably means that they are likely to impact larger firms as well, with some provisions even placing specific duties on organisations of a larger size.

“Name and shame” late payers

In an effort to strengthen payment transparency, the Government has made it clear that larger organisations will now be under a more stringent duty to report on their performance by reference to their payment practices and policies.

Secondary regulations still need to prescribe the details of this change but the legislation suggests that large manufacturers could now be required to report on a number of payment factors, such as:

  • the average time taken to pay
  • the proportion of invoices paid beyond agreed terms
  • the amount of late payment interest owed and paid

The Government has provided an indicative format for a report and the current intention is that reports will be required on a half-yearly basis. Reports will need to be provided in open data format to a single, central, digital location and the Government has said that it will work with stakeholders in the coming months to design a system that is as business and user friendly as possible.

While the change may not make particular payment terms mandatory, the duty to report on such terms invokes a “name and shame” transparency that could end up achieving the same result.

The provisions are therefore aimed at increasing competitive pressure to improve payment terms in line with peers and reduce the disparity in bargaining power between the different tiers that make up UK supply chains.

The enabling regulations are anticipated to apply from April 2016 but it’s strongly recommended that you begin to consider your current payment practices to assess whether you should be undertaking any changes.

Support to export

UK Overseas Export
UK firms have faced strong competition from emerging low cost economies and other industrialised nations.

Prospective overseas customers will now be able to access information on UK exporters and their products, more easily than before. Arrangements are also being put into place to enable UK Export Finance to support UK businesses, who are either engaged in or hoping to become engaged in exporting their goods and services.

The changes intend to increase export transparency by allowing manufacturers to have greater visibility of the UK exporting markets. It’s expected that this will enable exporting manufacturers to identify new customers, importing manufacturers to locate alternative UK suppliers and, importantly, provide an improved customer platform upon which all UK manufacturers can showcase their products to potential export markets.

The Government has recognised that UK manufacturing firms have faced strong competition from emerging low cost economies and other industrialised nations, such as Germany and Japan.

By facilitating product movement in this way, it’s therefore hoped that industry will see new entrants into the exporting markets and a strengthened collaboration across both UK and foreign supply chains.

For those manufacturers either involved in or wishing to become involved in exporting, these are much needed provisions to allow new supply chains to be created and foreign supply chains to be entered. SMEs considering exporting should be aware of the increased opportunities available as a result of these changes and how they may help their business to achieve its prospective aims.

Creating links with alternative lenders

UK lenders must now be more transparent about their SME lending decisions – arguably one of the most direct ways in which the SBA assists access to finance for SMEs.

If lenders reject finance for an SME, that firm is now able to request for their credit data to be shared with an online finance platform, which will use the information to match the firm with an alternative finance provider.

The intention is to apply the obligation to ten of the UK’s largest banks: Royal Bank of Scotland; Barclays; Lloyds Banking Group; HSBC; Santander; Clydesdale and Yorkshire Banks; Bank of Ireland; Allied Irish Bank, and Danske Bank.

This change comes only a few months after the Government announced that 50% of applications made by first time SME borrowers were being rejected. It’s hoped that the obligation will bring about better access to a wider range of finance solutions for SMEs, who may feel that they have nowhere left to turn for financial assistance.

With platform providers likely to generate profit from offering their services to banks and the mandatory requirement for particular lenders to comply, the changes are likely to affect the make-up of SME lending in a number of areas.

The plans could certainly therefore facilitate the emergence of new entrants into the manufacturing sector, while bolstering the current finances of many UK manufacturing SMEs – factors to bear in mind for competing firms.

Other changes

The SBA proposes a number of other changes aimed at improving access to finance for SMEs. These include invalidating restrictive terms in business contracts, putting banks under an obligation to share SME credit data with credit reference agencies, disclosing VAT registration information, providing for cheques to be paid by electronic ‘cheque imaging’ and altering the powers of the Payment Systems Regulator.

While the aims of the SBA are clear, it will take time to ascertain whether the provisions actually achieve those aims – history demonstrates that altering entrenched behaviours does not happen overnight.