Under plans to be laid out by small business minister Kelly Tolhurst later today, contractual restrictions which prevent small businesses raising money from unpaid invoices from bank and other investors will be outlawed.

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 the government says will help stop larger businesses from abusing their market position.

The regulations will apply to SME suppliers and exceptions will cover contracts for financial services, contracts with consumers and contracts connected with the sale of a business.

Tolhurst said: ‘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.

The government says 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.

The legal changes are set out in the draft ‘Business Contract Terms (Assignment of Receivables) Regulations 2018’.

Once the bill is passed, restrictions on invoice finance for SMEs in contracts agreed on or after 31 December 2018 will simply not have any legal effect in this way, so the changes introduced by the government involve no compliance or reporting burden to businesses. Government says it expects contracts to evolve over time to reflect the regulations.

Report by Pat Sweet