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New law: New regime makes it easier for small businesses to obtain invoice finance

Small businesses may find it easier to raise finance now that new laws say any provision in a business contract is void if it stops them raising money by assigning a ‘receivable’ to a third party, imposes conditions on an assignment or stops someone from valuing or enforcing the receivable.

February 2019

This update was published in Legal Alert - February 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

One way a small business can raise money is by assigning a ‘receivable’ to a third party in return for cash. ‘Receivables’ include rights to payment for goods, services or intangible assets. Intangible assets include electricity, data in digital form and intellectual property.

One example is where a small business sells its right to recover a debt, owed by a customer, to a third party in return for cash. Another is where someone with a right to collect royalties under a trade mark licensing agreement sells that right to someone else.

Some of the ways a small business can raise money by assigning receivables include invoice financing, factoring, receivables discounting, receivables purchase, forfaiting or supply chain financing. These forms of financing a business are particularly useful for a small business where there is a long gap between issuing an invoice and payment.

However, larger commercial contracts often contain clauses preventing the assignment of the right to recover money to which the business is entitled (the receivable) to a third party, imposing conditions on such an assignment or effectively stopping the receivable from being valued.

Under the new law, any provision in a business contract entered into from 31 December 2018 is void if it stops a small business from assigning receivables. It will also be void if it imposes conditions on an assignment that make it more difficult or stops someone from valuing the receivable or enforcing the assignment (for example, by denying them access to information necessary to start court proceedings for its collection).

The new rules apply only to business contracts. However, there are some exceptions where the rules do not apply, including:

  • at least one of the parties is a consumer;
  • none of the parties has signed the contract in the course of carrying on a business in the UK; and
  • on the sale of a business or undertaking and the contract states that the rules do not apply.

Operative date

  • Now

Recommendation

  • Small businesses should review their business contracts with business customers, businesses they have licensed to use their intellectual property, and other relevant business contracts, to see if they contain prohibitions on assignment of receivables, impose conditions on an assignment or stop someone from valuing or enforcing the receivable, as these are now void - which may mean they can now raise finance where they were previously unable to do so.

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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