Ain tackling late payment was announced on Thursday 4th October 2018 by the government to address the issue of tactical late payment by large companies to small businesses. This announcement comes in the wake of new legislation put to Parliament on Monday 10th September 2018 which stops large firms from banning their suppliers from access to invoice financing.
Until now, large firms have been able to tie SMEs into restrictive covenants which prevent them from securing invoice finance. Many small businesses find themselves unable to negotiate and therefore accept these unfair terms. This has created a culture of large firms using late payment of invoices as leverage when drawing up contracts with SMEs.
Larger companies know that if they impose long payment terms or simply pay late, the imbalance of power means that their small suppliers are unlikely to act against them.
Small Business Minister Kelly Tolhurst
The new legislation means that any such contracts signed after 31st December 2018 will be disregarded, allowing SMEs the opportunity to secure an advance against future invoice payments from financial providers. “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,” said Tolhurst.
The restraints of late payment are a crippling issue; as many as ahave reported that late payments threaten their survival. But the new legislation is not the first attempt to address the irresponsible payment culture amongst UK businesses. The government-backed Prompt Payment Code initiative was put into place in 2017 along with , but many large firms continued to delay payment, exploiting their position in the market and causing financial constraints on SMEs.
Eric Winterton, UK CEO at Bibby Financial Services commented: “Invoice Finance is an essential means of growth funding for more than 40,000 businesses throughout the UK. However, the Ban on Assignment of Receivables imposed by larger businesses can both limit and prohibit many SMEs from accessing much-needed working capital, stifling growth and placing pressure on cash flow."
The new regulations will address this institutional imbalance, a small step towards reducing the exploitation of SMEs by larger corporations. SMEs will be able to use financial providers to receive around 80% of the invoice payment immediately, with the remaining 20%, minus fees, being paid once the customer has settled the invoice. This payment structure will allow SMEs to regulate everyday cash flow and remove the.
The Federation of Small Businesses suggests that the change in legislation could add £2.5 billion to the UK economy and even keep up to 50,000 UK businesses from folding each year. Federation of Small Businesses National Chairman Mike Cherry commented: “Late payment is the biggest challenge affecting small businesses and it is good to see the government getting serious about this issue, especially when it comes to large firms paying their supply chains promptly.”
The new legislation is just one of many measures which form part of the. The strategy encourages small businesses to thrive and is committed to ensuring that Britain remains one of the best places to start and run a small business.