New regulations to help small firms recover unpaid invoices

New regulations are being introduced to help small businesses recover unpaid invoices from large companies.

The changes will make it easier for firms to access invoice finance. Ministers say this could provide a £1bn long-term boost to the economy

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.

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.

Restrictive contract terms are often used by larger businesses to maintain a hold over their suppliers, with small suppliers unable to negotiate changes to the proposed contract because they do not have enough power in the marketplace.

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 legal changes are set out in the draft ‘Business Contract Terms (Assignment of Receivables) Regulations 2018’.

Restrictions on invoice finance for SMES in contracts agreed on or after 31 December 2018 will not have any legal effect, so the changes involve no compliance or reporting burden to businesses. Contracts can be expected to evolve over time to reflect the regulations.

Small Business Minister Kelly Tolhurst said: “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.”

We shall keep clients informed of developments.

Please contact Neil O’Callaghan if you would like help with credit control and debt recovery.