The government has put forward new laws to arm small businesses against unfair contracts that stop them raising money from unpaid invoices.

Currently a small supplier’s contract with a larger company may prevent it from securing invoice finance from providers such as banks and other investors.

Under the new proposed laws, any such contractual restrictions entered into after 31 December 2018, with certain exceptions, would have no effect and could be disregarded by small businesses and finance providers, which will help stop larger businesses from abusing their market position.

The government claims the new measures could provide a long-term boost to the UK economy it estimated to be worth almost £1bn.

Kelly Tolhurst, small business minister, said: “The UK’s 5.7 million small businesses are the backbone of our economy and central to our modern industrial strategy, with more than 1,000 starting up every day.

“These new laws will give small businesses more access to the finance they need to succeed and will help ensure they have a level playing field from which to set fair contracts with the businesses they supply.

“The proposed laws come as a number of larger businesses stop their suppliers from assigning ‘receivables’ – the right to receive the proceeds from an invoice. This assignment is essential for invoice finance to operate.

“Restrictive contract terms are often used by larger businesses to maintain a hold over their suppliers, with small suppliers often unable to negotiate changes to the proposed contract because they do not have enough power in the marketplace.”

Edward Winterton, UK CEO at Bibby Financial Services, added: “Invoice finance is an essential means of growth funding for more than 40,000 businesses throughout the UK. However, the ban on assignment of receivables imposed by larger businesses can both limit and prohibit many SMEs from accessing much needed working capital, stifling growth and placing pressure on cashflow.

“The government’s proposals are a positive development and will undoubtedly support the growth of a wider number of businesses throughout the country, in turn boosting economic growth.”