So you’ve just landed your first contract with a large well known customer, the champagne corks have been popping in celebration, and you’re getting ready to push out production to meet the needs of the client. 

So what can possibly go wrong?

The buyers have inevitably giving you a 46 page purchasing agreement to sign, but there didn’t seem to be anything too much of a problem in that; in any case if you want to expand your business, you have to put up with some problems.

One of those is that you’re going to have to increase your funding facilities to meet the needs of this contract, but with the prospect of selling to such a prestigious customer, you’re surely not going to have problems in raising the cash?  There is much in the press nowadays about new sources of funding, so you may need to do a little bit of looking around, but it should you be ok.

But

Have you read the terms and conditions properly?

There are two potential pitfalls that large companies have a habit of enforcing on their suppliers which could make funding of this contract more difficult than you might imagine.

Right to assign – the first one to look for is a restriction on the ability to assign the debt; on the face of it this might not seem too much of an issue?  But an invoice discounting arrangement – which is the most common method of funding expansion of this nature – requires you to assign the rights to the debt to the funder as security against the advance.  Therefore, if this restriction is imposed on you in the terms and conditions you may not be able to discount those invoices.

Payment terms – the second major problem is that large companies are increasingly requiring payment terms in excess of 90 days as a norm.  This may not be a problem with some providers of an invoice discounting facility, but many providers insist that debts are paid within 90 or 120 days, and you can could therefore find yourself funding more than you anticipated.

The good news is that the government is intending to ban, or at least restrict, these practices; a good move which they can make to support smaller businesses in the UK. But legislation to enact this type of change could take quite some time to come into the statute book given that we have another election imminent.

In the absence of legislation, be very careful and read the fine print!