Hope for UK Businesses Seeking Finance for Invoices owed to them by Government Agencies and Public Bodies
Factoring and invoice discounting (both forms of receivables finance) are useful cashflow sources in the commercial marketplace and used by many SME’s. Following the global financial crisis of 2008 and the previous “credit crunch”, the UK government has looked to facilitate and encourage alternatives to traditional bank-led sources of finance, particularly for SMEs.
In this context, in 2014, the government published draft legislation that would, among other things, nullify provisions that prevent the assignment of invoices. The stated intention of this legislation was to remove barriers to receivables finance for SMEs.
As is common with governmental processes, the pace is slow and the situation is still not entirely clear but there is some hope that those of you who sell goods or services to large corporates, government agencies and public bodies may be able to access this type of finance if you wish. With a national reputation for advising banks and independent discounters in all aspects of invoice finance Bermans are regularly consulted by interested parties in the wider use of these products.
What is receivables finance?
Receivables finance allows a business to sell its invoices to a funder in exchange for funding up to an agreed percentage of that business’ customers’ underlying payment obligation. Depending on the quality of the customers paying the invoices, it is often around the 70 to 80% mark. It is particularly useful – perhaps vital – for SMEs, who may suffer cashflow issues, and the price the SME pays for this type of funding can be viewed as another expense of the business, akin to interest payable on an overdraft, possibly lightening the tax liability of the business.
The effect of non-assignment provisions
Traditionally contracts with large corporates, government agencies or public bodies have contained clauses which forbade selling invoices so even if your customer happened to be, for example, a public body and (hopefully) a gold plated debtor, you would still have to wait for the contractual payment period to expire to get paid and could not accelerate this through the use of receivables finance.
While these restrictions may be overcome in some instances by workarounds (such as trust arrangements or consents and waivers from third party debtors) this scenario simply causes delays and expense.
Recognition of the problem
In June 2014, the Small Business Enterprise and Employment Bill (Bill) was published. The Bill’s aims were wide-ranging however they included, in clause 1 of the Bill, draft provisions to prohibit restrictions on the assignment of invoices. Commenting on the draft legislation in June 2014, the Asset Based Finance Association noted that restrictions on assignment are “usually found in standard form contracts drafted unilaterally by large customers”. The Bill received Royal Assent on 26 March 2015
The Small Business, Enterprise and Employment Act 2015
The Small Business, Enterprise and Employment Act 2015 introduces an express power for the Secretary of State to make regulations intended to tackle barriers to the ability of businesses (not specifically limited to SMEs) to access invoice finance and other forms of receivables financing. In particular the legislation addresses restrictions that may be included in business contracts preventing the assignment of debts and we are hope to assist businesses in taking advantage of this opportunity for greater liquidity.
Section 1 of the Act provides that the Secretary of State may make regulations to ensure that any non-assignment of receivables term of a relevant contract would in certain circumstances have no effect.
As is the case with over-arching legislative principles, much of the detail and therefore the potential impact of these provisions, is left to the regulations that may be made under section 1 of the Act. As a consequence greater accessibility to this form of financing may not be too far from reality.
Consultation and draft regulations
In December 2014, the Department for Business, Innovation and Skills (BIS) published a consultation and draft regulations on the proposal to nullify the ban on invoice assignment.
Government response to consultation
In August 2015, BIS published the government’s response to the consultation. For the most part the response reiterates the government’s previously stated approach. However, it does attempt to clarify certain ambiguities in scope. For example, the response confirms the measures will extend to business-to-business (B2B) contracts only using English law where one of the parties is within the UK, regardless of the size of the businesses, and will exclude financial services contracts and contracts to do with interests in land. It also confirms that the measures will not create any special provisions for supply chain finance arrangements and that the legislation will not apply to contracts retrospectively. However, this is yet to be reflected in any revised legislation.
What does this mean for suppliers to large corporates and government/public bodies?
It remains to be seen how confident providers of receivables finance and their advisers may feel that the combined effect of the legislation renders assignment restrictions invalid in all appropriate cases. The possibility that some contracts may be excluded means that some finance providers may prefer to obtain express consents and waivers amongst other protections and we aim to use our experience to bring certainty in the midst of legislation with potentially selective effect.
It is unlikely that finance providers will dispense with the need for due diligence as it would remain best practice to understand the nature of the invoice that is being financed. However it is to be hoped that the new regulations will release some of the shackles to obtaining this type of finance.
In February last year the government indicated that its detailed response to the consultation would follow the 2015 general election. Separately a BIS press release on 10 August 2015 indicated that the “ban on anti-invoice finance terms in contracts will come into force early next year” (2016). As of late February 2016, no further information has been published. Enquiries with BIS have informally indicated that the regulations will be implemented in autumn 2016. We will update you further as soon as we hear more.