Historically a contract for the supply of goods or services often contained a clause that prevented the supplier from assigning a right under a contract to a third party for funding. For example, a party who supplied widgets to a customer under a contract may be prevented from assigning the right to obtain payment for those goods. This in short prevented the supplier from obtaining invoice finance on the invoices raised for the widgets as the lender may need to take an assignment of the debt.
The very recent approval by The Government on 24 November 2018 of The Business Contract Terms (Assignment of Receivables) Regulations 2018 (“the Regulations”) is a welcome development for small and medium sized businesses who are faced with such restrictions on their ability to raise finance due to restrictions on assignments. This article reviews the nature and effect of the Regulations.
The Regulations
The Regulations apply to specific contracts that are governed by the laws of England and Wales and also the laws of Northern Ireland and to clauses in those contracts which seek to prohibit or restrict the assignment of a receivable or service under the contract. A receivable is a right to be paid for goods or services. Using the example above, it is the sum to be paid under the invoice for the widgets.
What does this mean for businesses and their ability to raise finance?
In order to answer this question it is necessary to explain the conventional areas of business finance that are available to businesses to assist their cashflow.
Invoice Discounting
When an invoice is raised by a business, the key is getting that invoice paid. Until such time as the invoice is paid, the cashflow is tied up in that invoice. Invoice discounting allows a percentage of the invoice value to be paid by the lender pending payment by the ultimate customer. Once the invoice is settled in full, the business will receive the balance of the invoice less any fees due to the lender. Many lenders allow invoices to be uploaded to their systems immediately on the raising of an invoice which means cashflow can be unlocked from the invoice immediately on receipt.
Invoice discounting is mainly confidential which means the ultimate customer does not know that finance is being used. Further, the business can maintain control of their own credit management.
Invoice Factoring
The principle behind factoring is similar to Invoice Discounting, with the lender immediately releasing a percentage of the value of an invoice on receipt by the business. The difference is that when a business chooses to factor, this facility is not confidential and the ultimate customer will know the invoices are the subject of factoring. Many businesses and customers have no issue with this as invoice factoring is becoming more common place.
An additional benefit with factoring is that the lender will monitor the payment of the invoices by the customers which means the business has the benefit of effective and regular credit control and monitoring of the debts. As any business will know, the older an invoice becomes the less likely it is to be settled in full, resulting in bad debt which no business wants.
In order enter into any Factoring or Discounting facility, the lender would need to be able to take an assignment of the debt payable under the invoices. If the invoices were raised pursuant to contracts which contained the aforementioned “Ban On Assignment” clauses then lenders were reluctant to enter into any Invoice Finance agreements as they lacked the security of the debt. Whilst some lenders have been known to proceed in any event, businesses were often struggling to obtain any Invoice Finance where the contract contained the ban on assignments.
Since the introduction of the Regulations it is now hoped that contracts covered by the Regulations and entered into on or after 31 December 2018 will open up new avenues of funding for many small & medium sized businesses to assist with their cashflow and also to promote growth and more certainty.
As the Regulations do not appear to limit the size of the customer to a contract, it is hoped that smaller suppliers who enter into contracts with “large enterprise” customers will now be able to enter into Factoring or Discounting facilities whereas such contracts historically contained the Ban On Assignment clauses and left the small suppliers struggling to maintain cashflow.
It must be appreciated that the Regulations are in their infancy and in any event only apply to contracts entered into on or after 31 December 2018. Nevertheless they are a welcome change for many businesses and lenders alike, especially in the current economic climate.
If you would like to discuss how these new regulations could affect either your clients or your business, then please don’t hesitate to call Mark Millhouse on 07711 594030.