Steve Noble, COO, at Ultimate Finance
Although the seemingly continuous uncertainty around Brexit mean the news went under the radar, November saw both Houses of Parliament agree to pass legislation that will put an end to Bans on Assignment. I’m sure you’ll agree that this is great news that many SMEs will welcome with open arms.
Bans on Assignment are a type of contractual clause found in many debtors’ terms of sale agreements which create an environment where many SMEs aren’t able to raise money from unpaid invoices – increasing the pain caused by late payments.
SMEs and lenders alike are left struggling to overcome the obstacles created by Bans on Assignment clauses as currently they create a barrier when it comes to providing invoice finance. This is due to some financiers being hesitant to provide funding where the contract between clients and their customers contains this type of clause. If the financier IS prepared to provide funding, they will either have to find a workaround – such as requesting that the business approaches their customer for consent – adjust the pricing or request additional security from the client. Each of these options will add unnecessary time, will increase costs and generally make it difficult to obtain invoice finance. Unsurprisingly, this can result in SMEs either making do without the finance they require, or finding alternative types of funding that don’t align to their specific needs.
Why is this such good news?
The removal of Bans on Assignment clauses means that SMEs will be able to access invoice finance more easily. They will be able to assign receivables to invoice finance providers without having to waste time and money seeking consent from customers or trying to find workarounds which can make things unnecessarily complex. From next year, they’ll no longer have to worry about unnecessary difficulties when they’d like to release finances tied-up in unpaid invoices – and can instead enjoy the benefits of a quick boost to their cashflow.
The regulation also makes any clause preventing a party from determining the value of a receivable and being able to enforce it ineffective. Again, this will increase the appeal of invoice finance for so many SMEs across the country.
Is this good news for your business?
Obviously, this is great news for SMEs and lending partners across the country. However, there are still some caveats to the legislation.
- The regulations apply to contracts entered into on or after 31 December 2018. This unfortunately means that any contract entered into prior to this date containing a Bans on Assignment clause will remain intact
- They do not apply to receivables due to be paid to large enterprises or special purpose vehicles
- They exclude certain contracts from the scope of the regulations, for example those relating to land and for the provision of financial services
- They only apply to contracts governed by the laws of England, Wales and Northern Ireland
The final caveat has the potential to impact more than 345,900 SMEs in Scotland that may be looking to invoice finance providers for funding support. Any businesses north of the border entering into invoice finance contracts that include Bans on Assignment will therefore need to continue finding workarounds for the foreseeable future.
Hopefully this won’t be a permanent issue however as the Scottish Government is likely to look at the UK Government’s footsteps and consider similar legislation to ensure SMEs north of the border aren’t at a disadvantage compared to the rest of the UK.
Options for Scottish SMEs
While Scottish SMEs wait to hear whether Bans on Assignment clauses will be abolished in the near future, there’s a risk that some will find themselves at a disadvantage compared to their competition in the rest of the UK. It might not seem like a significant issue that one clause is still legal but when you realise the difficulties it causes SMEs in need of funding, it can equate to a substantial cashflow gap which could hinder investment opportunities.
For example, companies with a significant amount of partners that regularly miss payment deadlines may rely on invoice finance to relieve the issue. Not being able to access this could be the reason an SME is unable to replace legacy equipment, increase employee numbers, pitch for new business or scale up. When you realise how each of these could stop an SME from meeting their full potential, you appreciate just how important it is that Bans on Assignment clauses are removed from Scottish contracts next year too.
A positive start to 2019
Despite the caveats, it is great news for your clients that Bans on Assignment clauses will be null and void for the vast majority of UK SMEs come 2019. This should result in a simplified invoice finance service and therefore more small businesses accessing the financial support they need to increase their resilience and ensure they thrive. I truly believe good funding does the world of good and this legislative change will facilitate exactly that.