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3rd September 2015

Barriers to receivables finance for SMEs to be removed


3rd September 2015

Barriers to receivables finance for SMEs to be removed

The Department for Business, Innovation and Skills has announced that it will be implementing a ban on anti-invoice finance terms in contracts early next year as part of its commitment to economic growth through SMEs.

For many SMEs, its receivables (rights to future payment) are its primary means of raising finance to improve cashflow, whether as security for debts, under a factoring or invoice discounting arrangement or less commonly, securitisation. According to the Asset Based Finance Association, more than 44,000 businesses in the UK receive over £19 billion of funding at any one time in this way. However for many businesses, alternatives to traditional bank-led sources of finance are prevented by non-assignment clauses in the underlying contracts governing the supply of their goods or services. While in some cases there are workarounds (such as consents or waivers from third party debtors, causing monies to be paid to a trust account or establishing a power of attorney to pursue debtors), they typically involve higher transaction costs, delays and difficult negotiations with the relevant debtor and finance provider (which often require sensitive commercial information to be disclosed to debtors).

The problem is a long and internationally recognised one, which until now has been overlooked in the UK (neither Article 6 of the 1988 UNIDROIT Convention on International Factoring or Article 9 of the 2001 UN Convention on the Assignment of Receivables in International Trade were ratified by the UK and more recently, the problem was highlighted in the 2007 UNCITRAL Legislative Guide on Secured Transactions and a 2012 discussion paper published by the Financial Law Committee of the City of London Law Society). Countries such as the US, Canada and Australia have already implemented measures to tackle the issue.

The proposed ban, which will be implemented by regulations made pursuant to section 1 of the Small Business, Enterprise and Employment Act 2015 (in force since 26 May 2015), was described as an “overwhelmingly positive” step for SMEs by John Allan, National Chairman of the Federation of Small Businesses. Recent FSB research shows that 38{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} of their members who applied for finance were refused in the second quarter of this year. The Small Business Minister Anna Soubry said of the decision, “small businesses are the economic backbone of Britain and we will do everything possible to make sure they continue to grow and create jobs. By scrapping restrictions on invoice finance, thousands of firms across the country could benefit from faster access to hard-fought funds.”

It has been confirmed that the measures will extend to business-to-business contracts only, regardless of the size of the business, and that they will not apply to contracts retrospectively or to financial services contracts or contracts relating to interests in land. However, there are still fundamental ambiguities to be addressed. For example, it’s unclear to what extent the ban will impact on a debtor’s use of set-off rights, whether the ban will apply to contracts between corporate and non-corporate entitles of different sizes, or contracts containing strictly confidential material, or UK SMEs regardless of the governing law of the underlying contract, or even international parties where the underlying contracts are governed by English law.

Perhaps the biggest criticism made against the new ban is that while it will go some way towards making it easier for companies to access funds when they need it, it will not help many cash-strapped businesses unable to obtain receivables finance, which begs the question: would tighter regulation of late payment practices imposed by big business be a better way of tackling the problem?

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