Following months of consultation, the Department for Business Innovations & Skills has agreed to quash the bar on the assignment of invoices in commercial contracts.
The new rules are expected to come into force in April 2016 and will provide a power to nullify clauses prohibiting the assignment of invoices.
The new rules will apply to all business to business contracts regardless of size and will be welcomed by many suppliers who rely on invoice finance as a source of finance as well as invoice finance providers. According to the Asset Based Finance Association’s quarterly statistics to June 2015, approximately £15.1 billion was advanced against debt (pure invoice financing).
There are, however, a number of contracts which will be excluded, including:
- financial services contracts;
- business to consumer contracts; and
- contracts with interests in land.
The rules will also not apply to contracts retrospectively.
Invoice finance involves assigning the right to future payment to a finance provider, essentially enabling a business to use its unpaid invoices as security against which it can borrow funds. Invoice assignment can be a lifeline to many businesses, providing a vital injection of working capital which it might otherwise have to wait a long time to receive, and opens up access to alternative finance options.
The average number of outstanding debtor days for factoring clients is 54.7 days, with 53.8 days for discounting clients (as reported in the Asset Based Finance Association’s quarterly statistics to June 2015).
It is hoped that the new measures will therefore improve cash flow and access to invoice financing for SMEs, especially those involved in the supply of goods and services, providing a solution to the problem of late payment of invoices which continues to be a burden on UK companies. The new measures will also open up the market for invoice finance providers and provide access to those customers who were previously restricted by non-assignment clauses.
If you have any questions or wish to discuss this in more detail, please contract a member of our dedicated Asset Based Lending team.
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