The draft Business Contract Terms (Assignment of Receivables) Regulations 2018 are aimed at enabling smaller businesses to secure invoice finance from banks and other investors.
Current rules mean that a supplier’s contracts might prevent it from accessing invoice finance. The new proposals would mean that any such contractual restrictions entered into after 31 December 2018, would have no effect and could be disregarded by small businesses and finance providers.
The regulations contain exceptions for certain types of contract, such as contracts for financial services, contracts with consumers and contracts connected with the sale of a business.
Finance law expert Edward Sunderland of Pinsent Masons, the law firm behind Out-Law.com, said from the perspective of finance providers such as large banks and other financial institutions, the move was positive, as it would increase the amount of funding that they will be able to provide to SMEs.
“One of the representations that companies need to make before selling their debts, is that the debts are ‘assignable’,” Sunderland said. “And any debts from contracts that banned assignments were excluded from portfolio of debts, thereby reducing the amount the companies could receive as an advance payment.
“The invoice financiers can look both at the credit of the companies seeking an advance, and the debtor due to pay, before making a credit decision to fund. So a ‘weak’ supplier is able to obtain finance on the back of a stronger credit of their customers,” Sunderland said.
“Accordingly, most financiers in this space, and the companies seeking to raise funds, see this as a positive. This will benefit not just invoice finance, but also larger businesses, as it is a key legal provision in ‘big ticket’ securitisation deals, which also rely on the assignment of receivables,” Sunderland said.
Invoice finance allows a business to raise funds by assigning their right to be paid, or ‘receivables’, to a finance provider in exchange for funds, typically representing 80% of the value of the invoices. The initial advance is received within a few days and the balance is paid when the customer settles the invoice.
The regulations are designed to address purchase contracts that prohibit assignment, which prevents access to invoice finance. The measure is part of the government’s industrial strategy, originally unveiled in January last year.