The government recognises that businesses are dependent on adequate cash flow and that invoice finance is an important way of securing such working capital. Currently, around 40,000 firms in the UK use invoice finance. This is estimated to be only 10% of the number of businesses that could potentially make use of it. Currently £311 billion (14% of UK’s GDP) is supported through invoice finance.
Assignments of receivables are an essential feature of factoring and invoice discounting. Commercial contracts routinely contain provisions that prohibit the assignment of invoices due under the contract. If asked to fund such invoices, financiers have to use workarounds, such as requesting the debtor to allow assignment (which is usually refused) or using a separate trust account or a power of attorney. This increases the cost of providing invoice finance and, if the measures are not cost effective, then a facility will be refused or the funds available substantially reduced.
For years, powerful purchasers have flouted the credit terms of their weaker SME suppliers or imposed unreasonable credit terms on them. If invoice finance is then provided, such purchasers often refuse to deal with the financier by contractually inserting in their purchase conditions either a prohibition on assignment of the invoices or confidentiality terms. Such prohibitions and terms reflect the purchasers’ resentment of the collective commercial clout and professional expertise of invoice financiers.
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