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New legislation improves access to invoice finance

20 December 2018

In this article, we look at the implementation of The Business Contract Terms (Assignment of Receivables) Regulations 2018, which aim to remove the contractual barrier to invoice financing faced by many businesses.

Background

In many contractual agreements, ban on assignment (BoA) clauses prevent suppliers of goods and services from assigning receivables (the right to be paid any amount under a contract) to another party. This restriction is often a by-product of bans relating to subcontracting which are widely accepted as they prevent the performance of a contract being passed from the supplier to an unknown party.

BoA clauses are common in contracts across most sectors and prevent (often inadvertently) SMEs from assigning or selling contractual debts to third-party financers, significantly reducing access to invoice finance (a funding facility secured against unpaid invoices). This restricts firms' ability to secure capital needed to improve performance and productivity in order to grow.

BoA clauses restrict invoice financing options because they present significant risks to finance providers as counterparties to a contract could:

  • terminate a contract and refuse to pay invoices on the basis of breach of contract if an assignment was made against the terms of the agreement; and
  • refuse to pay the invoice if the supplier became insolvent, on the basis that the contract was invalidated by the assignment.

Financers therefore seek other means to offer finance such as requesting consent from the counterparty (which may be refused) or making alternative arrangements using a separate trust account or power of attorney. As a result, invoice finance has become more expensive and less obtainable for many suppliers.

 

Key changes

Under the new legislation, BoA clauses in relation to receivables are no longer enforceable. Suppliers are now able to access finance based on money owed to them in relation to contracts:

  • entered into on or after 31 December 2018;
  • which are governed by English law; and
  • under which one party carries out business within the UK.

 

Rationale

A decline in traditional bank lending has reduced access to finance for many businesses and, as a result, it has become increasingly important to access alternative forms of investment.

Invoice financing allows businesses to access working capital in exchange for the security of money owed to them by customers. A major proportion of businesses' assets are made up of sums owed for goods and services that have been provided, and unpaid invoices can be used to obtain funds from an invoice financer, using the invoice as collateral. The invoice can also be sold outright to a third party to raise funds.

The new regulations seek to give firms the freedom and flexibility to use invoice financing in a way that benefits them by removing contractual barriers while improving the accessibility and cost of this kind of finance. The measure will be particularly valuable for businesses who lack other assets (such as property) that could serve as collateral for bank loans.

 

Exclusions

The regulations do not apply if, at the time of the assignment, the supplier is:

  1. a large enterprise (a business that is not an individual, a partnership or a company or LLP classed as small or medium-sized under the Companies Act 2006 or corresponding LLP legislation); or
  2. a special purpose vehicle (a firm with a specific purpose in the financing of a project).

Certain agreements are also excluded from the regulations, including:

  • Financial services contracts;
  • Contracts involving an interest in land;
  • Contracts where neither party has an establishment in the UK;
  • B2C contracts; and
  • Contracts entered into prior to 31 December 2018 (the legislation is not retroactive).

In addition, BoA clauses relating to general subcontracting restrictions will not be affected meaning customers retain the right to prevent services being delegated to other firms.

Confidential safeguards will also be permitted, provided that they do not prevent an invoice financer from determining the validity or value of a receivable.

 

Conclusion

In nullifying BoA clauses to the extent that they prevent invoice financing, the Business Contract Terms (Assignment of Receivables) Regulations 2018 are likely to provide multiple benefits for firms looking to raise such finance in 2019 including:

  • increased availability of funding options, particularly for SMEs and entrepreneurs;
  • increased cash flow to support business development and growth;
  • reduced contractual barriers; and
  • increased business for finance providers, leading to reduced fees and interest costs for customers.

DWF have extensive experience in dealing with commercial contract issues. Please get in touch if we can be of assistance.

Further Reading