Restriction lifted on invoice finance to help SMEs grow

Posted on 10 Aug 2015 by Jonny Williamson

Firms are set to be freed from restrictive clauses in contracts that prevent them from gaining invoice finance when new measures come into force early next year, with more funding opportunities specifically benefiting small businesses.

Invoice finance allows businesses to apply for finance using invoices for money owed to them as security.

This means that, in some instances, they can get money faster than if they waited for their customers to pay them.

More than 44,000 businesses receive over £19bn of funding this way at any one time, according to the Asset Based Finance Association – which represents the invoice finance industry in the UK.

But the size of the market is limited by clauses designed to prevent a supplier from sub-contracting work.

Anna Soubry, Minister for Small Business, Industry and Enterprise
Anna Soubry, Minister for Small Business, Industry and Enterprise.

These clauses have the unintentional consequence of blocking invoice finance arrangements and will be nullified, while retaining a customer’s right to prevent traditional sub-contracting arrangements.

Small Business Minister Anna Soubry commented: “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.”

Chief executive officer of the Asset Based Finance Association, Jeff Longhurst described the announcements as, “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,” Longhurst said.

Piles of Coins
More than 44,000 firms receive over £19bn of funding via invoice finance at any one time.

He added: “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.”

National chairman of the Federation of Small Businesses, John Allan 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 FSB agrees with government’s stance that invoice financing should never be used as an excuse for late payment. We welcome the steps being taken to improve payment culture, including the recently announced plans for a Small Business Commissioner, and the strengthening of the Prompt Payment Code.”

The Small Business, Employment and Enterprise Act 2015 allows the Business Secretary 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 US, Canada and Australia.