Draft Business Contract Terms (Assignment of Receivables) Regulations 2018

Bill Esterson Excerpts

Monday 10th September 2018 General Committees

[Bill Esterson (Sefton Central) (Lab)]

It is always a pleasure to serve under your chairmanship, Mr Sharma. We are reminded that this place is chock full of lawyers—what would we do without them? Answers on the back of a postcard, please. I welcome the Minister to her first Front-Bench duty. As she said, we share a common heritage on the banks of the Medway—she is my dad’s MP, in fact. It having been a secret ballot, I cannot possibly divulge whether he voted for her. She and I were also Medway councillors before coming here.

Invoice financing can be described as the process of borrowing money to improve cash flow. The regulations suggest a potential demand 10 times that which is currently met through the use of invoice financing by smaller businesses. However, the Minister used the phrase “unintended consequences” in her remarks, and I caution that we need to beware of the potential downside of overuse of invoice financing—at the moment, an estimated 40,000 businesses use it. I say that because customers who see their suppliers relying or over-relying on invoice financing could and sometimes do question their stability. There is a balance to be struck in deciding whether to use something such as factoring, or the assignment of receivables, which is the correct legal term.

There is also a cost to using invoice financing, which is estimated at between 0.5% and 5% of the value of the invoice. As the Minister rightly said, one clear benefit of these regulations is the likely reduction in those costs, because of the reduction in risk and in the time taken up in applying invoice financing. Nevertheless, there is a cost, and it applies only because firms are having to use invoice financing in the first place, because there are alternatives. I shall spend a little time talking about some of them.

As the explanatory memorandum on the regulations tells us, invoice financing is related to cash flow. Note 7.1 describes the importance for businesses of “having adequate cash flow”, but in the same sentence that is set against the requirement to

“access…external sources of finance in order to invest and grow.”

It is very important to recognise the difference between funding and finance for cash flow on the one hand and longer-term finance for investment and growth on the other. They are very different, and the sources of finance should be very different—they cost very different amounts. Invoice financing is not the answer to long-term finance for investment or growth. The phrasing of the explanatory note is a little misleading, as it could suggest that invoice financing plays a part in long-term investment for growth.

Invoice financing is used for cash flow, but in many cases the question is why, because if customers pay promptly, there is no need to use it. We have faced the scourge of late payment in this country for far too long. In my three years on the Front Bench, I have spent a lot of my time discussing it. We have tried at length to address the topic in a couple of the Bill Committees on which I have served. It is the role of the small business commissioner to look at the problem, but his powers are very limited—they are limited to signposting and he has no powers to intervene. I have argued in Committee that he should be given such powers and I will return to that point later. The regulations have the potential to be a distraction from the problem of the lack of prompt payment.

We have a prompt payment code to which many large firms are signatories, but the reality is payment in 60 days—there is a 30-day payment term for Government contracts. The problem is how the code is enforced through the supply chain. As we saw with Carillion, far too often small firms were being paid late and the payment terms were not being enforced. Carillion, which was a signatory to the prompt payment code at the time, extended its payment terms to 120 days from the 60 days of the code. There is a requirement to publish performance against the prompt payment code, but the code is voluntary and therefore there is no assurance of compliance and, in any case, the 60-day requirement is that 95%, not 100%, of invoices are paid within that time.

The Federation of Small Businesses wants better access to invoice financing, and I agree with it, but it is also concerned about late payment. It estimates that large firms owe £6,142 to their small suppliers. It has campaigned on that for 10 years, but the concern remains that large firms use their smallest suppliers to help their cash flow by delaying payments. Some 40,000 firms use invoice discounting, but 50,000 go bust every year as a result of late payment. Thirty-seven per cent. of Federation of Small Businesses members are experiencing cash-flow difficulties, 30% use overdrafts to manage their cash flow and 20% are experiencing a slowdown in profit growth. Welcome though the proposals are, the figures the Minister cited from the explanatory notes estimate the financial benefits of the measure to be in the tens of millions of pounds, rising to the hundreds of millions which, in terms of the economy, are very small benefits.

Invoice financing has its place. Making it harder for large customers to prevent its use is helpful, but that is not the whole answer to the challenges of SME finance. I am struck by the fact that, according to the Federation of Small Businesses, only 9% of businesses approached their bank for finance in 2016. That is a tiny figure. There is a real problem in accessing finance. Today’s measures will address a small part of that problem but there is the bigger challenge of improving both access to finance for long-term investment and growth and the terms and reality of the payment of invoices.

We need a system with teeth. I have on many occasions recommended the Australian system of buying in arbitration, with fines for persistent late payment—a recommendation that found its way into Labour’s manifesto last year. Highways England uses project bank accounts, and I encourage the Minister early in her term of office to use her influence to have them considered much more widely for large Government contracts. They protect against insolvency and improve the reliability and promptness of payment.

I support the proposed change and the Opposition will not oppose the regulations, which lower costs and risks, but I repeat the call I have so often made that we need to improve payment practice. The Government must lead by example through Government contracts and by enforcing terms through the supply chain and helping with access to finance. That is how we will deliver the support that our SMEs need.