Tax & admin · 10 August 2015

Small and micro firms given access to invoice finance under new law

Small business minister Anna Soubry hopes the law change will support cash flow
Small business minister Anna Soubry hopes the law change will support cash flow

New legislation coming into force during 2016 will allow small companies to secure freedom from restrictive clauses preventing the use of invoice finance against money owed.

The development comes as the government attempts to reduce the impact late payment can have on micro firms’ ability to grow.

In their current form, many contracts forbid a supplier from sub-contracting work. This inadvertently means businesses are prevented from engaging with invoice finance providers due to the perception of them being third party.

Small business minister Anna Soubry believes that by binning restrictions on invoice finance, “thousands of firms” in the UK can benefit from quicker access to “hard-fought” funds.

“While invoice finance may not be right for everyone and is absolutely no excuse for late payment, I want small businesses to have the option of using it to increase cash flow,” she said. “This is all part of our plan to maintain the UK’s position as the best place in Europe to start and grow a business.”

Figures from industry body the Asset Based Finance Association (ABFA) found that 44,000 businesses receive in excess of £19bn of funding this way at any one time.

ABFA’s CEO, Jeff Longhurst, commented: “Bans on assignment are often imposed by large companies on their smaller suppliers. With the work being done on late payment and now on ban on assignment, government has shown it is committed to addressing poor payment practices and getting a fairer deal for smaller businesses.

“It is a complex area and we look forward to seeing the detailed regulations, but the government must be congratulated for the focus on this important area.”

Research compiled by Tungsten Network suggested late payment is putting nearly a quarter of all UK SMEs at risk of insolvency. Larger businesses were identified as the worst culprits, with the average British SME owed £41,000 in unpaid invoices – of which £21,000 is overdue.

FTSE 100 technology business Sage recently launched a its “Late Payments Manifesto” and an e-petition in the hope that attention can be brought to the issue of late payment.

Its research found that 68 per cent of small business owners have to wait for 60 days or more for payment, with more than half not getting money owed until after 90 days.

Brendan Flattery, president of Sage Europe, said: “The right to raise funds against outstanding invoices will ease cash flow for small businesses, but it does not tackle the problem.

“Fundamentally there needs to be a change in business attitudes and culture. That’s why we have launched a campaign to show the human impact of late payments and are calling on everyone to sign our e-petition and say that enough is enough – it’s time to ‘pay fair’.”

The government now hopes that the so-called “bans on assignment”, meaning micro and small firms will be able to use invoice finance to access unpaid capital, will complement its new Small Business Commissioner and recently-strengthened Prompt Payment Code.

Soubry added: “Small businesses are the economic backbone of Britain and we will do everything possible to make sure they continue to grow and create jobs.”

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Hunter Ruthven was previously editor of Business Advice. He was also the editor of Real Business, the UK's most-read website for entrepreneurs and business leaders at the helm of growing SMEs.