SMEs to be allowed to borrow against unpaid invoices

Government reckons new laws will provide £1bn boost to economy from small businesses

Updated Small businesses will be able to raise cash against unpaid invoices from the beginning of next year.

The government reckons this will provide a £1 billion long-term boost to the economy, and that £9.5bn worth of SME invoice finance is waiting to be unlocked.

At present, small businesses cannot raise cash against unpaid invoices from large firms. Big suppliers use not paying invoices as leverage when negotiating with SMEs. New laws will arm small businesses against these unfair contracts, which stop them raising money from unpaid invoices. This will help strop larger businesses from abusing their market position.

Small Business Minister Kelly Tolhurst said: “These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply.”

Larger businesses often use restrictive contract terms to maintain a hold over their suppliers; small suppliers are often unable to negotiate changes to the proposed contract because they do not have enough power.

From the start of 2019, SMEs can assign their right to be paid to a finance provider such as a bank in exchange for funds, typically 80 per cent of the value of the invoices. The initial advance is received within a few days and the balancing 20 per cent (less fees and charges) is paid when the customer settles the invoice.

Edward Winterton, UK CEO of Bibby Financial Services, was one SME lender who welcomed the news.

Winterton said: “Invoice finance is an essential means of growth funding for more than 40,000 businesses throughout the UK. However, the ban on assignment of receivables imposed by larger businesses can both limit and prohibit many SMEs from accessing much-needed working capital, stifling growth and placing pressure on cashflow.

“The government’s proposals are a positive development and will undoubtedly support the growth of a wider number of businesses throughout the country, in turn boosting economic growth.”