11/01/2019
Historically, contracts for supplies of goods or services often contained clauses that prevented one party transferring a right, under a contract, to another party. The introduction of the Business Contract Terms (Assignment of Receivables) Regulations 2018 (the Regulations) is therefore to be welcomed as it attempts to redress the difficulties faced by businesses, where such clauses restrict their ability to raise finance.
The Regulations apply to specific contracts entered on or after 31 December 2018 and apply to clauses contained within such contracts that seek to prohibit or restrict the assignment of a receivable under the contract, which is a right to be paid for goods, services or other intangible assets.
The Regulations are limited and only apply to contracts, where the supplier or seller, is a small or medium sized enterprise (SMEs), as defined by legislation.
The key provision to the Regulation is that any clause that bans the transfer of a right to another party is now unenforceable. This extends to other terms that impose conditions on the ability of one party to determine the validity or value of the receivable i.e. the goods, services, the debt, or their ability to enforce payment. Indeed, there are now 13 categories, which contracts cannot now restrict.
Exemption from the Regulations
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The key implication for businesses is that it will now provide greater opportunities to improve cash flow and recover payment. This comes in the guise of invoice discounting, and invoice factoring.
Example of how the old rules affected businessesA business who supplied widgets to a customer may have a term in their contract, which prevents the assignment of the right to obtain payment for those goods. This in turn would prevent them from obtaining invoice finance on the invoices raised for the widgets, as the lender may need to take an assignment of the debt. |
Invoice discounting allows a percentage of the invoice value to be paid by a lender, prior to full payment by the customer. Many lenders allow invoices to be uploaded to their systems immediately on the raising of an invoice, which means cash flow can be unlocked. Another benefit to invoice discounting is that it is confidential and so customers are unaware that finance is being used and it allows a business to maintain control of their own credit management.
The principle behind invoice factoring is similar to invoice discounting, with the lender immediately releasing a percentage of the value of an invoice on receipt by the business. The difference is that when a business chooses to factor, it is not confidential. However, as factoring is now becoming commonplace this is less of an issue. An additional benefit with factoring is that the lender will monitor the payment of the invoices by the customers, which provides effective credit control, meaning recovery of payment should be swifter and as is well known, the older an invoice becomes, the less likely it is to be settled in full.
To enter into any factoring or discounting facility, the lender would need to be able to have the debt transferred to them – the Regulations make this much more attractive as it now provides lenders with security over the debt.
With the introduction of the Regulations, it is hoped that new avenues of funding will open up for businesses, which will assist with cash flow and promote growth and certainty. It must however be appreciated that the Regulations are in their infancy and so only apply to new contracts, but are a welcome change, especially in the current economic climate.
Read other items in Commercial Brief - January 2019
Related item: Let’s be clear – pitfalls of entering into commercial contracts
