Invoice Finance restrictions on contracts to be outlawed from early next year


Anna Soubry

Minister for Small Business, Anna Soubry (pictured left) has announced that, from early next year, clauses in commercial contracts that obstruct the use of invoice finance (including “ban on assignment” clauses) will be outlawed.

This move is a direct result of the government’s crackdown on Britain’s late payment culture, after it was estimated that British businesses are owed approximately £26.8 billion in overdue payments – a figure that is set to rise.

For some businesses, invoices are the only assets against which they can borrow and larger firms especially can use restrictions in their terms and conditions to prevent supplier invoices being financed. This leads to delayed payments, and cash-flow difficulties for many SMEs.

Jeff Longhurst, chief executive of the Asset Based Finance Association said: ‘This is good news for UK businesses. 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.”

The Government has consulted a wide range of interested parties on this subject, including business owners, trade associations, lenders, academics and legal practitioners, and this change in the law is the result of feedback received.

A summary of the changes is as follows:

  • Apply to business to business contracts only (and not business to consumer contracts).
  • Extend to all businesses, regardless of size.
  • Exclude financial services contracts.
  • Exclude contracts with interests in land.
  • Do not create any special provisions for supply chain finance arrangements. This will allow suppliers to opt into supply chain financing agreements or seek alternative arrangements with other invoice financers.
  • Begin from commencement of the regulations – changes will not be retrospectively enforced.
  • Only apply where the parties conduct a business to business transaction under English law and one of them carries on business within the UK.

The Government hopes that by implementing these changes, it will directly benefit smaller businesses and reduce the abuse of position that some larger companies have exerted in the past. It is also hoped that it will contribute to making the UK a more attractive place to start and grow a business without fear of cash-flow issues or access to needed funds.

Ending late payments

Regular late payments from buyers is threatening the existence of businesses of all sizes, with smaller businesses most affected, according to the latest report from the Association of Chartered Certified Accountants (ACCA).

Fixing late payments with invoice financing management tools

Fixing late payments with invoice financing management tools

The ACCA is the world’s leading body for professional accountants, with over 110 years of experience, innovation and excellence. They champion opportunity within accountancy, demonstrate excellence, and act as a driving force within the accounting sector to improve working practices.

During 2014, ACCA conducted a review of the widespread problem of late payments, which is a life-threatening challenge for many businesses. This review brought together research to identify potential solutions.

From the review, ACCA developed a series of reports to show how late payments are having a detrimental effect on businesses of all sizes. The papers, named Ending Late Payment (1, 2 & 3) suggests that ….”30% of payments made to businesses in the UK are outside of agreed terms – with between 16 and 21% not being made until more than 60 days after the initial service”. The report claims the prevalent culture of late payments is largely down to the lack of a financial infrastructure that can boost trade credit.

The research findings were split into three reports;

Ending Late Payment Part 1 – reviews the quantitative data from the ACCA surveys to define late payment and its impact on our economy.

Ending Late Payment Part 2 – reviews and brings together a spread of commissioned publications and secondary research to help define good practice.

Ending Late Payment Part 3 – provides a summary of the findings and most importantly recommends calls to action for Government, financial services and businesses.

Part 3, which is no doubt what we will all be looking at, depicts how businesses (referred to as suppliers in the report) can reduce the risk of late payments. In a snapshot, this includes:

  • Creating and building longer term relationships.
  • Aligning objectives between all parties.
  • Protection through due diligence.
  • Careful contract design and ensuring that credit policies are understood.
  • Exploring and securing alternative sources of finance such as factoring/invoice finance.
  • Distinguishing between late payment and genuine credit risk.

Working on the above aspects will indeed help resolve late payment issues, but the number one question on lenders lips is Why is invoice finance the last option they choose to help manage late payments and cash-flow?’.

Well, to understand why, look at the list and ask yourself what the common denominator is? You may be thinking that these are all about improving internal processes except for invoice finance. If you are, then you are part of the majority.

But, think of it like this, if you want to create longer term relationships in your business, you may already outsource your communications plan for a fee. The exactly the same can be said for using invoice finance – outsourcing this will become a way of managing your invoices, regulating cash-flow and ultimately avoiding the pitfalls outlined in the report.

So effectively, invoice finance is a way for businesses to regulate cash-flow and ensure late payments are avoided, just like using a communications agency to regulate relationships. Effectively, invoice finance can be used as a management tool for defining and creating solid cash-flow management processes.

Gener8 Finance is one of the UK’s leading invoice finance solution providers. We are here to clear cash-flow obstacles from your path, make the invoicing cycle work in your favour, and deliver the peace of mind that comes from knowing that you can meet your payment obligations on time, every time. Our solutions are highly flexible and are designed to evolve as your ambitions and circumstances change.

Contact Gener8 to find out how we can tailor a solution to meet your business needs.