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The Department for Business, Energy and Industrial Strategy (BEIS) has laid before both Houses of Parliament revised draft legislation to tackle contractual terms in business contracts which prohibit or restrict the assignment of receivables (Draft Regulations). If implemented in their current form, the Draft Regulations will apply to any term in an applicable contract entered into on or after 31 December 2018.
The objective of the Draft Regulations is to facilitate access to finance for businesses by allowing them to assign receivables to a finance provider.
Who will be affected?
- Suppliers will have access to cheaper and more readily available finance;
- Invoice finance companies will do more business and their ways of doing business will be greatly simplified.
Who will not be affected?
Large customers (the debtors) will be largely unaffected.
For many businesses, a major part of their assets can be in the form of money owed to them for goods and services (accounts receivables). Here, a firm supplies goods or services to a business customer, for which it generates an invoice for payment at a later date. Whilst it is unpaid, the invoice can be used by the supplier to obtain funds from an invoice finance financer, using the invoice as collateral. Alternatively, the supplier can sell the invoice outright to a third-party finance provider. Both these forms of financing are collectively referred to as invoice financing.
Purpose of the Regulations
All businesses are highly dependent on cash flow and often require access to external sources of finance in order to invest and grow. A barrier to accessing this finance is a lack of sufficient collateral in order to offset lending risks for financers. This is a particular issue for small and medium sized businesses.
Traditionally, bank debt, whether through a loan or overdraft, has been the primary source of external finance for businesses to manage cash flow. However, the volume of lending to businesses has fallen. Given this decline in traditional bank lending, it has become increasingly important for businesses to access alternative forms of finance.
Invoice finance is an asset-backed finance product, and so is particularly useful for firms that do not have the standard types of collateral such as property. There is, however, a barrier currently preventing access to invoice finance by many small businesses; many large business customers contractually ban their suppliers from assigning invoices to others, which prevents them from using invoice finance. The Regulations seek to prevent this practice.
The evidence suggests that nullifying bans on assignment would:
- reduce fees;
- reduce interest costs;
- increase access to invoice funding for SMEs;
- reduce labour costs for invoice finance firms reviewing contracts and negotiating with clients when their sales ledgers contain a ban on assignment clause.
The Draft Regulations
The Draft Regulations provide that a term in a business contract will have no effect to the extent that it prohibits or imposes a condition, or other restriction, on the assignment of a receivable arising under that contract or any other contract between the same parties. This is expressed to include a term, such as a confidentiality provision, which prevents the assignee of the receivable from determining its validity or value or their ability to enforce it. A term prevents a person to whom a receivable is assigned from determining the validity or value of the receivable or their ability to enforce the receivable if the condition or other restriction prevents that person from obtaining—
a) the names and addresses of the parties to the contract;
b) the name and address of the person who on behalf of the debtor can confirm the validity and amount of the receivable;
c) the VAT registration number of the debtor and of the supplier;
d) the date on which the goods, services or intangible assets that give rise to the receivable are supplied;
e) a description sufficient to identify the goods, services or intangible assets that give rise to the receivable (including the quantity of goods or intangible assets, or the extent of services, the unit price, the rate of VAT and the amount payable, excluding VAT);
f) the date and number of the invoice for the goods, services or intangible assets that give rise to the receivable and any credit note related to the invoice (and the reason for issuing the credit note);
g) the amount, basis or rate of any applicable discount;
h) the total amount of VAT chargeable;
i) the reason for any VAT zero-rating or VAT exemption;
j) details of any term in the contract to which regulation 2(1) applies;
k) the credit period for paying the receivable;
l) evidence of the performance of that part of the contract (or other contract between the parties) which gives rise to the receivable; or
m) particulars and evidence of any potential defence or set-off by a party to the contract.
Exceptions from the Regulations
There are exceptions for suppliers who are large enterprises or special purpose vehicles and exceptions in relation to various types of contracts including those:
a) entered into in connection with, prescribed financial services;
b) concerning any interest in land;
c) where one or more of the parties to the contract is acting for purposes which are outside a trade, business or profession;
d) where none of the parties to the contract has entered into it in the course of carrying on a business in the United Kingdom;
e) concerning national security interests;
f) where one or more parties to the contract is a person designated as a counterparty for a contract for difference under section 7 of the Energy Act 2013(b) and who has entered into the contract by virtue of that Act;
g) a petroleum licence;
h) where one or more parties to the contract is the licensee in respect of a petroleum licence whose terms would prohibit or restrict the assignment of receivables under that contract;
i) which are entered into for the purposes of, or in connection with, the acquisition, disposal or transfer of an ownership interest in a firm, wherever it is incorporated or established, or of a business or undertaking or part of a business or undertaking, and which includes a statement to that effect.
It is hoped that the Regulations will make the business finance market more accessible, increase invoice finance options and provide entrepreneurs with cheaper and more readily available finance. Currently around 40,000 firms in the UK use invoice finance. It is estimated that this is around 10% of the number of businesses that could actually potentially make use of it.
The Regulations aim to give more freedom to invoice financers to fund SMEs. They will no longer need to worry about whether any of the invoices issued by a business are affected by ban on assignment clauses because such clauses will become invalid under the Regulations. Invoice financers will therefore be able to provide small suppliers displaying similar economic characteristics with the same amount of funding and at similar interest rates, regardless of the presence of a ban on assignment. The extra funding will help put firms on a firmer financial footing and give them the cash flow to grow.
The Regulations will be reviewed after 5 years to assess their impact on businesses and the wider economy.