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September 11, 2018updated 24 Feb 2020 2:51pm

UK gov’t plans major reform to SME invoice finance

Small business minister Kelly Tolhurst has announced plans to allow unrestricted access for SME invoice finance.

By Christopher Marchant

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.

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, in a move intended to help stop larger businesses from abusing their market position.

Speaking at a first delegated legislation committee, Tolhurst said of current conditions: “Larger companies know that if they impose long payment terms or simply pay late, the imbalance of power means that their small suppliers are unlikely to act against them…These onerous terms prevent suppliers from assessing the finance they need to thrive and grow.”

SME invoice finance: lessons from Carillion

The planned new regulations for SME invoice finance 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.

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.

Esterson said: “We have faced the scourge of late payment in this country for far too long. We saw with Carillion that far too often small firms weren’t being paid and the payment terms weren’t being enforced.”

Speaking of the proposals Edward Winterton, UK chief executive officer of 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.”

Further reaction from lessors

Also reacting to the changes to SME invoice finance, Carl D’Ammassa, group managing director of business finance at Aldermore, said:

“We welcome today’s announcement from the Government that looks to better equip small businesses to compete for contracts with larger firms, whilst aiming to give them better access to the finance they sorely need to succeed.

“With these new measures expected to provide a long-term boost to the UK economy of almost £1bn, it is clear this morning’s announcement is a step in the right direction for UK small businesses – the bedrock of the UK economy.

“We call on MPs to accept these new measures, that take an important step in addressing some of the funding issues faced by small businesses and give them the chance to compete on merit for their chance to succeed.”

The move is a sign of further reform following plans to diversify SME funding from RBS to more challenger banks. The Banking Competition Remedies (BCR), the independent body established to implement £775m RBS funding known as the State Aid Alternative Funding Package, has appointed an executive director and targeted November for applications from UK challenger banks for the RBS funding.

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