Invoice Finance – SME liberation

Invoice Finance – SME Liberation

Early next year (2016) the government plans to relax the invoice finance rules, which no doubt will allow lots more business to improve their working capital. (Working capital is the money a company uses to pay for its day to day bills). The Asset Based finance Association (ABFA) has been lobbying government for some time to relax the rules relating to invoice finance. Invoice finance also known as invoice factoring is a means by which a business is able to sell a sales invoice to a 3rd party and get an advance payment on the invoice. The invoice finance company will generally collect the money from your client, obviously the invoice finance company will do this for a cost.

There are a number of reasons this is happening, basically the UK has a late payment culture. On average it takes SME’s 72 days to collect money from debtors and there is a year on year increase in this collection figure. The longest wait for payments has been recorded at 121 days. An increase in debtor collection figure is normally expected during bad economic times, however the UK economy is strengthening.

Essentially the prolonged recession has created a very cautious business environment which to date is continuing. ABFA members also have a vested interest in relaxing the invoice finance rules, currently more than 44,000 businesses in the UK have invoice finance arrangements so a relaxing of the rules will mean more business for the invoice finance industry. It is estimated that approx. £26bn is owed to small business in unpaid invoices. Often for small business Debtors, unpaid sales invoices, are there biggest asset and cause them serious working capital problems.

For the most part if you trade with a large corporates you are likely to experience longer invoice payment terms. It is the larger corporate that puts restrictions on smaller companies using invoice finance by using a “Ban on Assignment” clause in their terms of business. It is this clause the government is looking to change. Larger companies now have to change these trading terms or face the consequences.

The government intends to appoint a late payments commissioner who will deal with supply chain bullying. The government will also set up a late payment conciliation service designed to help SME’s settle late payment issues and disputes. Although the change in “Ban on assignment” terms is welcomed, invoice finance is not suitable for every small business.

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