An important legislative change is about to happen which will hopefully enable greater access to invoice finance. A draft Statutory Instrument under section 1 of the Small Business, Enterprise and Employment Act 2015 has been placed before Parliament for approval which contains new Regulations to nullify the effect of restrictive terms in B2B contracts that can limit access to finance for small businesses.
Since the credit crisis, the Government has been keen to encourage the alternative finance market, including asset-based finance, for SME’s. Following extensive consultation, the new measures will enable businesses, particularly smaller businesses lower down the supply chain, to access wider funding options by invalidating or restricting the effect of any “non-assignment of receivables term” of a “relevant contract”.
A “non-assignment of receivables term” or, as it is more commonly known, a “Ban on Assignment”, is a term which prohibits or imposes a condition, or other restriction, on the assignment by a party to the contract of the right to be paid any amount under the contract or any other contract between the parties. A “relevant contract” is a contract for goods, services or intangible assets (including intellectual property) which is not an excluded financial services contract, and at least one of the parties has entered into it in connection with the carrying on of a business.
In December 2014, in advance of the Act coming into force, the Department for Business, Innovation & Skills published draft Regulations which have become The Business Contract Terms (Assignment of Receivables) Regulations 2018. The draft Regulations are due to apply to contracts entered on or after 31st December 2018. The new Regulations only apply to B2B contracts and will have no impact on consumer transactions. Financial services and certain other contracts are also excluded to ensure the measures are focused on trade receivables rather than specific financial instruments or products that require assignment to be restricted.
For many years the Invoice Finance Industry has sought to overcome the problems caused by a Ban on Assignment by using techniques such as customer waivers. However, the ability of the debtor to ignore the invoice financier and the additional complications a ban causes in debt recovery proceedings will not be missed other than perhaps by the poor lawyer!
Under the new Regulations, an assignment by a client to an invoice financier of his right to payment under a contract will effectively trump any non-assignment clause contained in the contract made between the client and his customer.
This is to be welcomed and should have a number of effects:
First, removing the effect of a Ban on Assignment will go some way to enabling businesses obtain invoice finance without the client or invoice financier incurring the administrative cost of seeking a waiver from the debtor, and thereby disclosing the existence of the financing arrangement.
Secondly, invoice financiers are less likely to reduce the amount of funding made available to clients to mitigate the risk of loss arising out of non-assignment clauses.
Thirdly, it should reduce the cost of collecting debts as debtors will no longer be able to obtain a valid discharge by making payment direct to the invoice financier’s client.
An Impact Assessment carried out by the Department for Business, Energy and Industrial Strategy estimates that the new Regulations will enable £800m of additional funding to be made available to current users of invoice financing products, and between £100m and £150m of new funding to become available to new invoice finance clients.
Our view is that the new Regulations represent a very welcome and positive step in the right direction for businesses seeking access to finance. However, invoice financier’s will continue to undertake reviews of their client’s contractual terms of business to assess not only the client’s ability to assign its right to payment but also to assess whether rights of set-off, counterclaim or deduction pose a risk to collection, as the new Regulations don’t touch upon these issues.
If you require any further advice, please contact:
Noel Ruddy: 01403 831 206 [email protected]
Sian Webber: 01403 831 278 [email protected]
eCapital Corp
eCapital Corp. is committed to supporting small and middle-market companies in the United States, Canada, and the UK by accelerating their access to capital through financial solutions like invoice factoring, factoring lines of credit, asset-based lending and equipment refinancing. Headquartered in Miami, Florida, eCapital is an innovative leader in providing flexible, customized cash flow to businesses. For more information about eCapital, visit eCapital.com.
