The Rules: Invoice Finance Will Soon Be A Positive Cash Management Option Open To All Businesses

The Government’s plans to relax invoice finance rules early next year is music to the ears of many small and medium-sized businesses whose growth has been held back by Britain’s late payment culture for far too long, reports John Atkinson.

So-called ‘bans on assignment’ rules prevent smaller suppliers from using invoice finance as a source of funding. They are often imposed by bigger businesses when dealing with SME suppliers and have hampered the growth of small businesses for a number of years.

The Asset Based Finance Association (ABFA) which represents the industry has been lobbying with the government in recent years to enforce these changes and transform attitudes towards invoice finance. Unpaid invoices are the biggest asset some small businesses have and the law has been unfairly stacked against them until now.

Invoice finance is used by more than 44,000 UK businesses to fund working capital and alleviate the knock-on effect of late payments. This means that instead of having to wait 90 days to receive payment for the invoice, businesses can unlock the cash they need straightaway. Invoice finance companies provide businesses with the cash up front, based on the value of any unpaid invoices, minus a small fee for collecting the debt. However, ‘bans on assignment’ rules effectively means a company isn’t able to sell the invoice and the customer refuses to deal with an invoice finance provider when they issue the bill. These rules are particularly prevalent in the construction industry and have also impacted some SMEs looking to secure public sector contracts.

While acknowledging invoice finance isn’t right for all, bans on assignment have contributed to a set of conditions that make doing business incredibly difficult for small and growing companies, particularly those that are trying to establish supply links with larger businesses. This change is long overdue and is an extremely positive step for the growth of Britain’s SMEs – it is part of the government’s wider Small Business, Enterprise and Employment Act, which a number of measures are being introduced in 2016 to tackle late payments. It’s been predicted that £26bn is owed to Britain’s small businesses in unpaid invoices. The government is now set to appoint a new late payments commissioner to deal with supply chain bullying and late payers as well as the introduction of a conciliation service designed to assist small businesses in settling late payment issues and disputes.

Unfortunately, Britain is riddled with a late payment culture. According to the ABFA, UK SMEs are now waiting an average of 72 days for payment of invoices – a day more than a year ago – despite the strengthening economic recovery.The impact of the recession has meant that the smallest businesses are now waiting an average of 11 days longer for payment than they were even at its height. Taken as a protective measure to safeguard their financial positions during the credit crunch, it became the norm for many businesses to pay late. In essence, the longer firms are able to hold onto money and keep cash in the business, it allows them to strengthen their position and make funds work harder. However, its Britain’s small businesses that have felt the brunt of this.

The recession has created a cautious business culture and companies are now more conscious of spending than ever. For many fledgling start-ups and small enterprises that are often cash poor, this is detrimental to growth. They simply cannot wait up-to 72 days to fund a weekly wage and cover overheads so it is wholly positive that the new government is taking proactive measures to address this.

To ensure they’re compliant, larger businesses should review existing contracts and use the ‘ban on assignments’ as an opportunity to be more transparent and open about their terms. Big businesses can demonstrate they are willing to take a more collaborative approach and treat SME suppliers fairly through communicating their intentions and publishing information about the prompt payment of bills. For larger firms that practice late payment, time is running out and they now need to adapt practices or risk suffering reputational damage in the future.

It is likely that the majority of SMEs in a contract with a larger firm aren’t aware of this incoming change. For those small businesses experiencing cash flow issues due to late payment, new options will soon exist which could help them to grow and plan ahead with a more confident cash position. Businesses should act now to review any existing agreements and negotiate terms to remove the restrictions. Although large companies have a role to play in raising awareness of the change, some may not do so proactively.

It’s important that the government and industry continues to raise awareness of the impact of late payments and does its upmost to support SMEs. As part of these efforts, the logical next step might be for the government to outlaw those businesses that pay beyond 90 days. Research conducted amongst our clients revealed that some of the worst offenders take up to 121 days to pay which is simply not acceptable. SMEs are widely regarded as the backbone of the UK economy, which their growth holds the key to a long-term economic recovery. Late payment and ‘bans on assignment’ have been allowed to hamper that growth and this is a positive first step for businesses.