All businesses no matter what size are reliant on cash flow to be sustainable, but small businesses in particular are affected by cash flow issues. Managing Directors of small businesses are always on the hunt for ways to improve cash flow and many use invoice finance as a way to increase the working capital within the business and not crumble under the affect of late payments.
Invoice finance is a particularly attractive way of small businesses improving cash flow because often the only assets a small business has which they can borrow against is the invoices due to them for the services they have already provided to the customer. In addition to the borrowing potential; the use of invoice finance means that instead of waiting 30, 60, 90 or even 120 days for payment the business can get access to the cash owed immediately.
This all sounds great and it seems that invoice finance provides the perfect solution for small businesses looking to manage cash flow.
But what about ‘Bans on assignment’?
It has been commonplace for many small business to be stopped from using invoice finance by the larger businesses that they supply goods and services or sub-contract to. This was due to a clause in the supplier contracts called ‘bans on assignment’.
‘Bans on assignment’ effectively means a small business cannot use an invoice finance provider because the customer refuses to deal with the invoice finance provider when they pay the bill. The construction industry in particular was affected by ‘bans on assignment’ and also SMEs looking to get public sector contracts.
The Small Business, Enterprise and Employment Act 2015
In February 2015 the government reviewed small business in the UK, and outlined a number of measures that are to be introduced in 2016 to improve the growth of the SME market in the UK.
These measures include:
Removal of the ‘Ban on Assignment’ clause
Appointing a late payments commissioner to deal with supply chain bullying and late payers
Introduction of a service to help small businesses settle late payment issues and disputes.
It is predicted that £26bn is owed to small businesses in Britain in unpaid invoices and some of this is due to ‘Bans on assignment’. This clause has made it particularly difficult for small and growing companies to work with larger businesses and was a key factor in the collapse of the construction industry in 2007. As cash thirsty businesses were unable to get quick access to their much needed cash, they began trading insolvency and ultimately it led to an epidemic of insolvencies across the construction industry. This resulted in job losses and had a knock-on effect on the UK economy overall.
Now whilst invoice finance isn’t right for every business, it is an option that should be available to every business looking to improve cash flow. The Small Business, Enterprise and Employment Act 2015 goes some way to improving business conditions for SMEs. Find out more about The Small Business, Enterprise and Employment Act 2015 or visit http://www.legislation.gov.uk/ukpga/2015/26/contents/enacted for the full version.
Thank you for taking the time out to read this post, remember if you’re in the construction industry and you are experiencing cash flow issues then invoice finance might be the solution for your business.
If you have been affected by the ‘Ban on Assignments’ clause in the past, please share your experience with other readers and download our latest e-book on Practical Finance for SME businesses for more free info about how to manage cash flow in your business.