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Thursday, 1 October 2015

Member Blog: Removing restrictions on invoice finance for SMEs

Chamber member Paul Burke, Managing Director of Davenham Asset Finance, comments on the removal of a number of unfair clauses that have been impacting UK SMEs when it comes to invoice finance.
It has been vowed by the Small Business Minister to remove restrictive covenants used by many large businesses to the detriment of cash strapped SMEs – something prohibiting them from using invoice finance. In 2016 new measures will be introduced by the Government under the Small Business and Enterprise Act 2015.

The restrictive clauses were originally introduced into contracts to prevent suppliers from subcontracting work, however due to the way the clauses were drafted they ended up preventing companies from accessing invoice finance funding. The provision of invoice finance requires the assignment of debts as security, and such a clause removed the ability to provide funding, thus leaving SMEs unable to access this form of asset based lending (ABL).

At one time, approximately 44,000 businesses receive more than £19bn of funding this way, however the size of the market is hugely limited by such clauses; an issue that has been recognised for decades and acknowledged internationally as a problem, but until now has not been addressed by the UK Government.  As unpaid invoices represent one of the biggest assets many UK SMEs have, these clauses have been restricting a vital source of funding, so the news of these clauses being removed is welcomed by many small businesses in an ever difficult economic environment.

By removing these restrictions on invoice finance, thousands of small businesses across the UK can benefit from faster access to funds, and while invoice finance may not be suitable for some, it is imperative that small businesses have the option of utilising invoice finance to increase their cash flow, rather than being restricted to a small number of traditional funding options. With the Small Business Minister stating ‘small businesses are the economic backbone of Britain’ – we agree that the necessary steps should be taken to ensure that the restrictions are lifted in order for SMEs to continue growing and creating jobs within the UK.

Cash strapped SMEs should also remember that there are other ways of accessing funding via the provision of asset refinance, seeing capital tied up in their plant and machinery being released, thus helping to support their working capital requirements. In addition, asset finance is an easy way for SMEs to purchase those important assets needed to help grow their businesses. Here at Davenham we offer both products and work in partnership with our clients to ensure we can offer the maximum level of funding they require.

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