Factoring and invoice discounting are forms of asset-based funding structures which enable businesses to ease cashflow and fund growth by selling book debts and other receivables due to them from customers at a discount for immediate cash. Industry figures show an increasing use of such funding – £275 billion in 2013, up by 10% on the previous year.
However, a recent Government consultation on improving access to finance for small and medium-sized enterprises (SMEs) identified one area which can act as a restraint. Under their standard terms of business, some customers do not allow their suppliers to assign (that is, sell) the debts due from them – this effectively prevents suppliers in such a situation from using factoring or invoice discounting. The Government is now proposing legislation to address this.
Provisions in the recently-published Small Business, Enterprise and Employment Bill will enable the Government to issue regulations to make ineffective any clause in a ‘relevant contract’ which bans or restricts the assignment (sale) of the right to be paid any amount under the contract . A ‘relevant contract’ is to be one for the sale or supply of goods or services (but not financial services) entered into in the course of business.
Much of the detail, and therefore the potential impact of these provisions, is left to the regulations that are to be made under section 1 of the Bill, once in force. In particular, the regulations can provide that the ban only applies to certain types of business and/or only in certain circumstances. It is anticipated that they will be focused on SMEs, although this is yet to be seen.
The industry trade body, the Asset Based Finance Association, has welcomed the new rules, calling bans on assignment “a significant barrier to small businesses getting appropriate financing”.
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