Small business minister Kelly Tolhurst said the proposals would give SMEs "more access to the finance they need to succeed". ©PA Images
Small business minister Kelly Tolhurst said the proposals would give SMEs "more access to the finance they need to succeed". ©PA Images

New law gives SMEs access to invoice finance

10 September 2018

The government has proposed new laws which will stop buyers from contractually limiting SME suppliers’ access to supply chain finance from the beginning of next year. 

Small business minister Kelly Tolhurst has put forward laws which will end big companies’ powers to stop their suppliers from assigning ‘receivables’ – the right to receive the proceeds from an invoice – by writing it into contracts.

It is hoped the measure, which forms part of the government's modern Industrial Strategy, will provide a £1bn long-term boost to the economy, giving small businesses the ability to pass on their right to be paid to a lender in exchange for funds.

Under current regulations, large companies are able to negotiate contracts with smaller suppliers which prevent them from securing supply chain finance from providers such as banks and other investors. These suppliers are often unable to negotiate changes to the proposed contract because they do not have enough power in the marketplace.

But under the proposed measures any such restrictions entered into from 1 January 2019 could be disregarded by small businesses and finance providers. The government said this would help stop larger businesses from “abusing their market position”.

Supply chain finance allows suppliers to raise funds by assigning their right to be paid – known as receivables – to a finance provider in exchange for funds. These typically represent 80% of the value of the invoices. This initial payment is received within a few days and the balancing 20% is paid when the customer settles the invoice.

Some purchase contracts include terms that prohibit assignment, preventing access to invoice finance. It is these contract terms that the regulations will address.

The government estimates the current value of the stock of invoice finance to SMEs is approximately £9.5bn.

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.”

Mike Cherry, chairman of the Federation of Small Businesses (FSB), welcomed the move, saying small firms wanted the option to access invoice finance.

But he said the laws only addressed the underlying issue “indirectly”.

“The UK’s £14 billion late payment crisis sends thousands of firms to the wall every year. It needs to end,” he said.

“In an ideal world, we wouldn’t have small businesses relying on invoice finance for survival – they would be paid promptly by big firms who see the benefit of respecting their supply chains rather than as a means to short-term credit.

“The collapse of Carillion has brought the late payment crisis into sharp relief. More action is urgently needed to build on today’s announcement.

“That includes publishing the terms of the late payment consultation we were promised in the spring and appointing non-executive directors with responsibility for ensuring suppliers are paid on time to all boards.”

The regulations would apply to SME suppliers and contain exceptions for certain types of contract, such as contracts for financial services, contracts with consumers and contracts connected with the sale of a business.

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