Building a Responsible Payment Culture: Government Response May 2014

Alternative Financing Options

95. It would be a significant benefit for many small businesses to understand and have more confidence in using the full range of options now available for managing cashflow as a normal part of doing business. Some of the most common finance options available to small businesses to manage cashflow beyond loans and overdraft facilities are:
 Factoring and invoice discounting – where a business effectively gets a cash advance against payments due by selling or borrowing against all or part of its debtor book;
 Asset Based lending – where funding is secured against an asset of the business such as property, machinery or stock; and
 Supplier finance (also called supply chain finance or reverse factoring). This is where a customer puts facilities in place that mean that suppliers can claim payment immediately from a third party finance provider. The supplier gets the whole value of the invoice less a discount that is based on the customer’s credit rating. The customer then settles with the finance provider when the payment is due.
96. In the discussion paper, we asked what can be done to increase awareness of these financing options, and lower the costs to small businesses of accessing them. We also asked whether small businesses are experiencing difficulty in accessing some of these alternative financing options as a result of contractual terms imposed on suppliers by more powerful customers.

Questions Asked

97. The discussion paper asked respondents the following questions regarding alternative financing options:
 Question 22: Do small businesses have adequate access to the information and support they need to understand the external financing options available to them? What would help raise awareness of these options?
 Question 23: How could working capital options be made cheaper and more accessible to small businesses?
 Question 24: Would removing contractual barriers to selling invoices (e.g. as a result of a ban on assignment) be helpful to small businesses by increasing their access to services such as factoring and invoice finance?

Views Received

98. In general, it was felt that small businesses do not currently have a full understanding of the financing options that are available to them and that a negative perception of such options prevails amongst many smaller businesses. It was noted that even when they are aware of the possibility of options such as factoring and asset financing, small businesses do not always know where to access impartial advice on how to utilise these options. A number of respondents suggested that a single source of information on financing options for small businesses would be helpful.

Building a Responsible Payment Culture: Government Response

99. A number of respondents suggested that the best way to make alternative financing options cheaper and more accessible to small businesses is to focus on addressing late payment of invoices. It was noted that an improved cashflow would lead to a stronger credit rating for suppliers, which could allow them to access credit and financing on cheaper terms. Some respondents also suggested that Government (or the British Business Bank) could provide targeted funding solutions to reduce the costs of such financing options to small businesses.
100. A small number of respondents suggested that reducing the costs of such financing options may not be possible or advisable. They suggested improving education available to small businesses to enable them to understand which working capital financing options might be most economical for them.
101. A majority of respondents to the last question agreed that removing contractual barriers to selling invoices would help increase access to financing options such as factoring and invoice finance. Nevertheless, some respondents noted that further barriers, such as aversion to external financing amongst many small businesses and the costs of such options, may continue to discourage small businesses from accessing these financing options.

Government Response

102. We appreciate that, for some businesses, invoice and working capital financing may not be appropriate. Nevertheless, we believe that more can be done to increase the availability of such options to those who would benefit from them. In particular, we agree with respondents that action should be taken to remove unhelpful contractual barriers to the provision of finance. We therefore intend to introduce legislation to tackle contractual barriers such as bans on assignment when Parliamentary time permits.
103. We recognise that a better awareness and understanding of finance options would help smaller businesses to access appropriate finance solutions for their needs more effectively. This is why one of the objectives of the British Business Bank is to promote better information for smaller businesses on the finance options available to them in the business finance market, including by working in partnership with finance providers and advisors to smaller businesses.
104. Another of the British Business Bank’s key objectives is to help create a more diverse market for finance for small businesses with greater choice of financing options and providers. This is best reflected in its combined Investment Programme, which has a current portfolio of 10 commitments to 9 finance providers totalling £172m that support lending capacity of over £800m through a range of alternative

“Awareness and understanding amongst growing businesses of these finance options is low. In particular, invoice factoring can carry negative connotations, with businesses fearing they will seem to be unable to mange their finances”. Confederation of British Industry response

“Such barriers are an unnecessary restriction and are an articulation of the disparity of power in a commercial relationship. It is notable that they are usually found in standard form contracts drafted unilaterally by large customers”. Asset Based Finance Association response

Building a Responsible Payment Culture: Government Response

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finance providers such as direct lending funds, peer to peer (P2P) lenders and supply chain finance providers. To date, over £280m of lending to smaller businesses has been supported as a result of these commitments, which also help to accelerate the development of the respective alternative provider models. Further commitments under the current Investment Programme will build on this lending capacity and support more diversity in the market.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315462/bis-14-793-building-a-responsible-payment-culture-government-response.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315462/bis-14-793-building-a-responsible-payment-culture-government-response.pdf - See more at: http://www.abfa.org.uk/news/2014/June/pressrelease050614.asp#sthash.ZDp597rL.dpuf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315462/bis-14-793-building-a-responsible-payment-culture-government-response.pdf - See more at: http://www.abfa.org.uk/news/2014/June/pressrelease050614.asp#sthash.ZDp597rL.dpufGovernment response to the Consultation on Building a Responsible Payment Culture - See more at: http://www.abfa.org.uk/news/2014/June/pressrelease050614.asp#sthash.ZDp597rL.dpuf

Consultation on Building a Responsible Payment Culture
The full Government response to the Consultation on Building a Responsible Payment Culture is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315462/bis-14-793-building-a-responsible-payment-culture-government-response.pdf
- See more at: http://www.abfa.org.uk/news/2014/June/pressrelease050614.asp#sthash.ZDp597rL.dpuf

Consultation on Building a Responsible Payment Culture
The full Government response to the Consultation on Building a Responsible Payment Culture is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315462/bis-14-793-building-a-responsible-payment-culture-government-response.pdf
- See more at: http://www.abfa.org.uk/news/2014/June/pressrelease050614.asp#sthash.ZDp597rL.dpuf

Consultation on Building a Responsible Payment Culture
The full Government response to the Consultation on Building a Responsible Payment Culture is available here: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/315462/bis-14-793-building-a-responsible-payment-culture-government-response.pdf
- See more at: http://www.abfa.org.uk/news/2014/June/pressrelease050614.asp#sthash.ZDp597rL.dpuf