The UK government has announced some plans to deliver on the labour manifesto pledge to “take action on late payments to ensure small businesses and the self-employed are paid on time.”
According to the Federation of Small Businesses’ (FSB) research, late payments are one of small businesses’ greatest challenges. When invoices are delayed, a business’s cash flow is threatened, and it resorts to other measures to keep afloat, such as taking on expensive debt.
By addressing this issue, the government is acknowledging the critical role that timely payments play in the survival and growth of the UK’s 5.51 million small enterprises.
How the government will crack down on late payments
In a press release on 19 September 2024, the government announced that it will begin a consultation to introduce tougher laws that hold larger companies more accountable for paying on time.
This includes new legislation requiring all large businesses to include reports of their payments in their annual reports. This is intended to come into effect in the coming weeks. More details, including instructions on how to conduct this reporting, could be announced in the upcoming Budget announcement on 30 October.
Making payment reporting mandatory will mean company boards and international investors will have full transparency over whether firms treat smaller businesses and suppliers fairly. This should pressure them to maintain a good reputation by paying punctually.
The government also says it plans to improve its enforcement of the existing late payment performance reporting regulations. Under current laws, responsible directors who don’t report their payment practices could face criminal prosecution, including potentially unlimited fines and criminal records. How exactly the government will step up this enforcement currently remains unknown.
These changes mark initial steps towards a slightly fairer playing field for smaller businesses. Knowing that larger companies are being held accountable may encourage better business practices and foster more reliable partnerships.
Why are late payments such an issue for small businesses?
Put simply, when small businesses don’t receive payment for their products or services when they expect it, it creates a gap in their cash flow. This can disrupt their planning and create a domino effect on other businesses, where they also cannot pay their suppliers and bills.
According to data from accounting software company FreeAgent, nearly half (49%) of invoices sent by UK small businesses in the past year were paid late. And this problem is getting worse. The current late payment rate of 49% is a six-percentage-point increase from the same period last year (43% in 2022/23).
“Maintaining a healthy cash flow is the number one priority for anyone running a business” says Roan Lavery, CEO and co-founder of FreeAgent. “However, the vast majority of small businesses simply don’t have the luxury of being able to absorb late payments into their accounts – they need to get paid promptly to keep themselves afloat.”
The government’s press release stated that some small business owners, forced to wait months for contracts to be fulfilled, have had to take out loans against their own homes to manage cash flow.
The cost of late payments on UK small businesses
Another accounting software company, QuickBooks, used its data to calculate the amount small businesses were owed from unpaid invoices in September 2023.
Shockingly, more than one in ten (11%) are owed between £50,000 and £100,000. Considering the tight margins many small businesses work with compared to larger businesses, this is a significant burden of debt to have no control over.
The average amount SMEs are currently owed in late payments is £27,214. That’s enough to hire a new full-time member of staff. Sadly, 80 of the survey’s respondents stated that they even had to consider firing staff before due to money owed from late payments.
So clearly, late payments are a huge pain point for small businesses, threatening their ability to afford essential day-to-day operations. Cracking down on late payments should free up a company’s cash for what it really needs to function and grow. It will enable them to invest their time in hiring more employees, boosting wages, and doing their essential work for the UK economy rather than wasting time chasing down late payments.
While we wait for the government to consult on its new measures, there are some ways SMEs can take control to prevent this issue from happening.
Steps business owners can take to get paid on time
By taking these steps, small business owners can ensure that their payment terms are effectively communicated to clients. This proactive approach can significantly reduce the risk of late payments and contribute to the overall financial health of their business.
1. Review the terms listed on invoices
Ensure that payment terms are clear and upfront with clients. Specify the payment due dates in invoices and contracts (e.g. ‘Payment is due within 30 days from the invoice date’).
It’s sometimes recommended that businesses indicate that they charge interest on late payments. GOV.UK advises that businesses can claim an annual statutory interest of 8% plus the Bank of England’s base rate, which is currently 5%.
2. Use e-invoicing software
Accounting software can track invoices and send automated reminders a few days before payment is due. This can save businesses precious time in manually spotting and chasing up unpaid invoices and help keep payment timelines top of mind for clients.
Steve Hare, CEO of Sage, claims that e-invoicing reduces late payments by 20% and processing times by 44%, saving small companies an average of £11,300 annually.
3. Be aware of guilty culprits
Before entering a contract with a larger business, check whether their track record is listed on Good Business Pays’ Late and Slow Payment Watchlist. If there’s evidence the business is poor at paying on time, it will be a risk and may be worth pursuing an alternative.
