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The UK minister for small businesses, Kelly Tolhurst, has put forward new laws to help small businesses access invoice finance.

Currently a small supplier’s contract with a larger customer may prevent it from securing invoice finance from providers such as banks and other investors.

Under the new proposed laws, any such contractual restrictions entered into after December 31, 2018, with certain exceptions, would have no effect and could be disregarded by small businesses and finance providers.

The intention is to help stop larger businesses from abusing their market position.

The new measures are expected to provide a long-term boost to the UK economy estimated to be worth almost £1bn.

Tolhurst said: “The UK’s 5.7 million small businesses are the backbone of our economy and central to our modern industrial strategy, with more than 1,000 starting up every day.

“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.”

The proposed laws are in response to a number of larger businesses stopping their suppliers from assigning ‘receivables’ – the right to receive the proceeds from an invoice. This assignment is essential for invoice finance to operate.

Restrictive contract terms are often used by larger businesses to maintain a hold over their suppliers, with small suppliers often unable to negotiate changes to the proposed contract because they do not have enough power in the marketplace.

The legal changes are set out in the draft ‘Business Contract Terms (Assignment of Receivables) Regulations 2018’.

The estimated current value of the stock of invoice finance to SMEs is approximately £9.5 billion.

Invoice finance allows a business to raise funds by assigning their right to be paid (known as ‘receivables’) to a finance provider in exchange for funds, typically representing 80% of the value of the invoices. The initial advance is received within a few days and the balancing 20% (less fees and charges) is paid when the customer settles the invoice.

Invoice finance is not borrowing, because the supplier is receiving an advance against a future payment.

Some purchase contracts include terms that prohibit assignment, which prevents (or inhibits) access to invoice finance.

The regulations would apply to SME suppliers and contain exceptions contracts for financial services, contracts with consumers and contracts connected with the sale of a business.