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Government announces new measures to boost funding for small businesses

New laws to arm small businesses against unfair contracts that stop them raising money from unpaid invoices have been put to Parliament which will make it easier for small businesses to access invoice finance.  The adoption will prove a £1bn long-term boost to the economy, according to the Department for Business, Energy and Industrial Strategy and form part of the government’s modern Industrial Strategy, building an environment in which small businesses can thrive.

Currently a small supplier’s contract with a larger company 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 31 December 2018, with certain exceptions, would have no effect and could be disregarded by small businesses and finance providers, which will help stop larger businesses from abusing their market position.

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. Suppliers sometimes accept these contracts because of their weak negotiating position. It is these contract terms that the regulations will address.

The Regulations would apply to SME suppliers and contain exceptions for certain types of contract, such as contracts for financial services, contracts with consumers and contracts connected with the sale of a business.

Kelly Tolhurst, Small Business Minister 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 come as a number of larger businesses stop 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.”

Luke Hamm, chief executive of innovation tax specialist GovGrant, welcoming the proposals said: “I’m delighted the government is proposing to introduce measures such as this to help the UK’s 5.7million small businesses thrive and prosper. We hear regularly from smaller suppliers who are tied into restrictive contracts with larger players, for example in the supermarket sector, and it is extremely difficult for them to negotiate changes in contractual terms.

“It is a cliché to say that small businesses are the backbone of our economy, but the numbers speak for themselves.“

Hamm also called on the Chancellor Phillip Hammond to champion small business in the forthcoming Budget in November, pointing to innovation and R&D (where GovGrant specialises) as a policy area which needs a boost.

“We need to prioritise innovation and industrial strategy," he said, "As the announcement on invoice finance shows, the government’s industrial strategy has its heart in the right place, but it’s still unambitious, and needs more imagination and drive. Aiming for 2.4% of GDP invested in R&D by 2027 is mediocre; that’s where Germany is today. 

“We’d also like to see more help for the smallest companies where they are scaling up but opt not to draw market salaries, the scheme doesn’t allow for that: 20 people working very hard in SME opt for a 10K salary but they don’t get funding to acknowledge that.”

He added that the annual HMRC report on R&D tax credit statistics, due to be published shortly, will provide an important snapshot for how widely the UK’s innovative companies are making use of the government’s tax credit system. 

 

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