Invoice finance restrictions to be relaxed for small businesses early next year

9th September, 2015

In a previous Be Wiser Business Insurance article, it was reported that small businesses are owed an estimated £26bn in late payments and that a ‘late payment culture’ was becoming the norm in supply chains across a number of UK industries.

The late payment culture causes issues for a number of smaller firms, some of which struggle to stay afloat with insufficient cash-flows. These problems are compounded by banks unwilling to finance businesses with large numbers of outstanding debts.

However, the government has recently announced plans to relax invoice finance rules, which are expected to come into effect by early 2016. This will make it easier for small and medium sized enterprises (SMEs) to access invoice finance products.

Invoice finance is the lending of money against unpaid invoices to fund working capital and mitigate cash flow issues caused by late payments. According to the Asset Based Finance Association (ABFA), which represents the British invoice finance industry, it is used by more than 44,000 firms nationally, who receive over £19 billion of funding at any one time.

As part of the governments wider Small Business, Enterprise and Employment Act, restrictive clauses in invoice finance contracts, known as ‘bans on assignment rules’, are set to be scrapped. These clauses currently hinder the growth of smaller companies by preventing them from using invoice finance.

It is hoped that by providing small business owners the opportunity to obtain finance more quickly that they will be able to plan for the future from a more confident financial position and that it will underpin organic growth.

CEO of ABFA, Jeff Longhurst said: “This is 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”

“Bans on assignment are often imposed by large companies on their smaller suppliers. With the work being done on late payment and now on bans on assignment, government has shown it is committed to addressing poor payment practices and getting a fairer deal for small businesses.”

“It is a complex area and we look forward to seeing the detailed regulations, but the government must be congratulated for the focus on this important area.”

Head of commercial business at Hitachi Capital Invoice Finance also championed the announcement, saying: “This change is long overdue and is an extremely positive step for the growth of Britain’s small businesses. Unpaid invoices are the biggest asset some small businesses have and the law has been unfairly stacked against them until now.”

“For larger firms that practice late payment, time is running out and they now need to adapt practices or risk suffering reputational damage in the future. The logical next step might be for the government to outlaw those businesses that pay beyond 90 days. Research conducted amongst our clients revealed that pay beyond 90 days.”

Minister for Small Business, Anna Soubry, has also publically backed the move, saying: “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 cash flow.”

“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.”