Government Plan to Level the Playing Field for Construction SMEs

Government Plan to Level the Playing Field for Construction SMEs

19th September 2018

Some good news on the way for the construction industry here in the UK, especially for small to medium building companies, many of which have worried about cash flow issues.  The collapse of Carillion at the beginning of this year highlighted the fact that so many SMEs here in the UK building industry are put at risk of the domino effect when such a large company goes under.  In fact, Carillion’s liquidation hit the construction industry hard, affecting a massive 47% of companies at a time when business was already uncertain due to the ongoing quandary as Brexit negotiations take place.

Under current legislation, a small supplier’s contract with a large business prevents it from securing invoice finance from banks and other investors.  Large companies often stop their suppliers from assigning “receivables”, the right to receive the proceeds of an invoice.  The good news is that Small Business Minister, Kelly Tolhurst, is proposing changes that would mean that any contractual restrictions entered into from the beginning of next year would no longer stand (with exceptions). 

Sales contracts often contain clauses stating that assignment is prohibited or subject to specific conditions.  These assignment clauses have been used to prevent a supplier from subcontracting work but often have the unintended consequence of blocking invoice finance arrangements which allow business to apply for finance based on invoices for money owed used as security. 

Under the proposed new legislation, any contractual restrictions entered into after 21 December, 2018 would have no effect, meaning that they could be ignored by small businesses and finance providers. 

The change is designed to help stop larger companies “abusing their market position” as smaller companies often find it impossible to negotiate changes to contracts as they do not have the same marketplace power.  The new legislation should give small business easier access to the finance they need to ensure success, which it is hoped will go some way towards levelling the playing field when they enter into contracts with the larger companies they supply services or products to.

Maintaining a steady cash flow can be a real challenge for smaller companies which often rely on payment from large companies in order to carry on their day to day operations.   A healthy cash flow is vital for a healthy business so making sure that customers or clients pay as quickly as possible is a vital part of running a business.  One of the most common reasons that SMEs struggle to stay afloat is a chaotic cash flow that arises when they are owed money by customers, and this is especially true for small companies who supply larger, multi-national businesses, many of which have a habit of late payment or not paying at all.

SMEs are the backbone of the UK economy, so the government’s plan to address the problems faced by small business owners in the construction industry is a welcome step for our sector.  We’ll be keeping an eye on this situation to bring you more information as it’s released.  Follow us on Facebook or Twitter so you don’t miss out on the news you need to make informed decisions about your business.