New rules proposed for SME invoice finance
Small Business Minister Kelly Tolhurst has proposed new laws to help SMEs challenge contracts that prevent them from securing invoice finance. If introduced, the rules will make it easier for companies struggling with late payments to secure finance and improve their cashflow. Ms. Tolhurst says this could have a huge positive impact on the UK economy.
The new rules in context
Invoice finance is a way of securing short-term finance by assigning unpaid debts to a finance company, typically a bank, as ‘receivables’. Typically the finance provider will provide 80% of the invoice value up front, with the remaining 20% paid once the invoice is settled – minus the fees agreed for the service. It’s a useful way for SMEs to access funds quickly without resorting to borrowing.
Currently, large businesses often lock small suppliers into tight contracts that restrict their ability to assign these receivables to a third party. It’s a move designed to keep control over suppliers and reflects the difficult negotiating position faced by small businesses in the UK.
How new laws could help
The new laws proposed would make any contractual restrictions agreed beyond 31st December 2018 void. So they can effectively be ignored by small firms and invoice finance providers, without the need for additional admin or legal action.
SMEs will, however, need to pay close addition to the details of the law, as the government says there will be exceptions. These will include contracts for financial services, contracts with consumers and contracts connected with the sale of a business.
Potential long-term impact
The government estimates the current value of invoice finance paid to SMEs is around £9.5 billion. By making it easier for more businesses to access this short-term loan facility, they believe the economy will receive a long-term boost worth £1bn.
On an individual level, the SMEs affected by this will certainly be helped by fresh access to funding, which can mean a lifeline when cashflow is tight. But it should not seen as a complete solution for late and non-payment. Instead, SMEs must take this as another step toward a stronger position in the market and be ready to push harder for fair payment terms.
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