As part of its general initiative to facilitate small business’ access to finance, the Department for Business, Innovation and Skills has published the Government’s response to its consultation on its proposals to nullify contract clauses that prohibit assigning invoices.
What is invoice finance?
On top of its normal cash flow, most businesses require debt finance to support their day to day operations. In addition, businesses may need access to debt finance to support one off capital expenditure, for example for expansion and growth.
The usual prerequisite for debt finance is a valuable asset over which the business can grant security to the lender for repayment of the debt. Particularly for small enterprises, a business’ most valuable asset may be its debtor book, or in other words, the invoices due for payment to the business for the goods or services it has supplied.
In exchange for the business assigning its right to payment under the invoices to the lender, the lender makes a loan to the business equivalent to a discounted proportion of the value of the invoices, thereby providing the business with short term liquidity and a regular working capital stream.
Why is access to invoice finance currently inhibited?
Some customer contracts contain clauses that ban a business assigning its invoices. Such bans are typical in standard form terms and conditions imposed by large corporate customers to prevent their suppliers subcontracting work. A ban may be outright or require the customer’s consent.
Such bans make it difficult for the business to access invoice finance because they prevent the invoices being effectively assigned to the lender. This means the lender may not be able to enforce and collect payment under the invoice or the customer may refuse to pay the lender.
There are ways around the bans on invoice assignment, including setting up more complex trust arrangements or obtaining consents and waivers from the customers. However, these methods can significantly increase the lender’s due diligence requirements leading to higher transaction costs, which may be prohibitive for smaller businesses.
How has the Government responded?
The Government proposes to introduce regulations which nullify clauses that ban invoice assignment. The US, Canada and Australia have already introduced similar rules. In England and Wales, it is proposed that such regulations would:
- only apply to clauses in business to business contracts (not business to consumer contracts) where the contract is governed by English law and one of the businesses is UK based;
- affect all businesses, irrespective of size;
- exclude finance services contracts (because the ban on assignment can be important in preserving set-off arrangements);
- exclude contracts with interests in land (because there are already regulations governing such arrangements, for example, tenant legislation); and
- apply to contracts automatically from commencement of the regulations (but the prohibition will not apply retrospectively).
When will the changes be implemented?
The draft Regulations  will need to be revised following the consultation and the Government aims to begin the parliamentary process this Autumn.
There are still ambiguities in the draft regulations which ought to be resolved, including whether clauses banning charging (as well as clauses banning outright assignment) of invoices will also be nullified by the regulations.
The ban on anti-invoice finance terms is expected to come into force in early 2016. Only time will tell whether invoice finance lenders will feel confident that the new Regulations are effective to nullify bans on invoice assignments despite express wording in the contract to the contrary.
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 Business Contract Terms (Restrictions on Assignment of Receivables) Regulations 2015