A parliamentary hearing has given further insight into how proposed new legislation on SME invoice finance would work. Christopher Marchant takes a closer look at the political developments
Small business minister Kelly Tolhurst has announced plans to allow unrestricted access for SME invoice finance, with larger companies no longer able to block the practice through binding contract stipulations.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
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. Larger businesses would stop their suppliers from assigning receivables – an essential element for invoice finance to operate.
Under the new proposed legislation, 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, in a move intended to help stop larger businesses from abusing their market position.
Speaking at a first delegated legislation committee in the Houses of Parliament, Tolhurst said of current conditions: “Larger companies know that if they impose long payment terms or simply pay late, the imbalance of power means their small suppliers are unlikely to act against them. These onerous terms prevent suppliers from assessing the finance they need to thrive and grow.”
EXISTING CONTRACTS
The planned new regulations are not intended to affect existing contracts. In the future, blocks on invoice financing may still be applicable for financial services, contracts with consumers and contracts connected with the sale of a business.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataThrough the regulation, it was assessed that the savings to businesses from lower discount fees would be £13.7m. The reduction in service charge based on turnover would be £46.1m.
Income generated from new business applications would be around £84.6m, and the total net benefit to businesses was placed in the region of £966m. Also speaking at the select committee, shadow small business minister Bill Esterson noted that the Labour party would not oppose the proposals, while also reiterating his desire for an Australian-style system of binding arbitration in which large companies receive fines for consistent late payment.
He also reiterated that invoice finance comes at a percentage cost to SMEs, for what can be the fault of the larger company in delaying payment. Esterson said: “We have faced the scourge of late payment in this country for long enough. We saw with Carillion that far too often small firms weren’t being paid and the payment terms weren’t being enforced.”
LEAD BY EXAMPLE
Esterson also repeated his calls for “the government to lead by example, enforcing terms through the supply chain as well as helping with access to finance”. Tolhurst recognised that invoice finance reform was only one element of the issues surrounding late payment that can blight SME cash flow.
She said: “This is not about favouring one type of finance over another. Invoice finance will not be the right choice for every business. This is a decision for individual entrepreneurs, not ones that are made for them through onerous terms imposed by their customers.
“These regulations ensure that restrictive terms will no longer apply to SMEs, while protecting freedom of contract for large enterprises.” The regulations on invoice finance were commended to the committee without a single ‘no’ vote.
JOBS AND RECEIPTS
As to how the proposed legislation would affect the sector as a whole, Tolhurst said: “It will also aid the ability of new invoice financiers to enter the marketplace, and that is something we would welcome.
That brings more jobs and hopefully more receipts to the exchequer.” Tolhurst also related figures bolstering the support for invoice finance reform: the 5.7 million SMEs in the UK account for over half of turnover and 60% of employment in the private sector. She added that finance was the “lifeblood” of these businesses, and that total bank advances in the UK are £22bn, of which £20bn is invoice finance.
Edward Winterton, UK chief executive officer at Bibby Financial Services, said: “Invoice finance is an essential means of growth funding for more than 40,000 businesses throughout the UK. However, the ban on assignment of receivables imposed by larger businesses can both limit and prohibit many SMEs from accessing much-needed working capital, stifling growth and placing pressure on cashflow.
“The government’s proposals are a positive development, and will undoubtedly support the growth of a wider number of businesses throughout the country, in turn boosting economic growth.”
