Crack down on late payments in major support package for small businesses

The government has unveiled new measures today to support small businesses and the self-employed by tackling the scourge of late payments, which is costing small businesses £22,000 a year on average and leads to 50,000 business closures a year.

The government will consult on tough new laws which will hold larger firms to account and get cash flowing back into businesses – helping deliver our mission to grow the economy.

In addition, new legislation being brought in the coming weeks will require all large businesses to include payment reporting in their annual reports - putting the onus on them to provide clarity in their annual reports about how they treat small firms. This will mean company boards and international investors will be able to see how firms are operating.

Enforcement will also be stepped up on the existing late payment performance reporting regulations which require large companies to report their payment performance twice yearly on GOV.UK.

Under current laws, responsible directors at non-compliant companies who don't report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records.  

The consultation which will be launched in the coming months, will also consider a range of further policy measures that could help address poor payment practices.

Every quarter, 52% of small firms in the UK have suffered from late payments, meaning roughly 2.6 million small firms face this issue, with the Federation of Small Businesses describing it as one of the biggest problems facing SMEs.

Late payments are just one element of the problem, with some SMEs forced to wait months for contracts to be fulfilled and some are even forced to take out loans against their own homes to manage cash flow.

Cracking down on late payments will unlock growth for 5.5 million small firms by enabling them to invest their time hiring more employees, boosting wages, and exporting around the world, rather than chasing down late payments.

The Business Secretary will hold a joint call with the Federation of Small Businesses later today to outline to SME leaders the work the Department will undertake to put in place tough new laws to end bad payment culture. New proposals, subject to consultation, will be bought forward on audit and audit committees, in order to help rebuild small businesses' trust that they will be paid on time and to deliver on Labour's manifesto commitment to tackle late payments.  

Prime Minister Keir Starmer said: 

“We're determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.

“We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. Late payments cost businesses tens of thousands of pounds and is one of the biggest reasons businesses collapse.

“After years of delay, we're bringing forward measures that small businesses have long been calling for to tackle late payments once and for all.”

Business Secretary Jonathan Reynolds said: 

“Late payments are simply unacceptable and this government is determined to level the playing field for small business. When the cashflow runs dry, small firms go under which is why we need to hold larger business to account with their payment practices and foster an environment that supports growth and jobs. 

“Slashing trade barriers, reforming business rates, getting more SMEs exporting – this government is committed to small firms. We know there's a lot more to be done, but today we are calling time on late payers once and for all.” 

A new Fair Payment Code has also been announced today replacing the old Prompt Payment Code, and will be open to signatories this autumn. Businesses will need to prove they have met good payment standards before being awarded official code status.

This will be designed to push businesses to pay faster more often, to be awarded either gold, silver or bronze status. The Code will also shine a light on those responsible businesses doing the right thing by their suppliers and small firms. 

It comes as part of our wider work to support SMEs to help go for growth with reform to business rates, getting more small firms exporting and our new industrial strategy. The Secretary of State and Small Business Minister Gareth Thomas will discuss the new measures with small businesses later today.

New research published by the Department for Business and Trade has found payment problems multiply the further down the supply chain you go. With delays to payments increasing with each business along a supply chain, this results in smaller businesses generally experiencing more issues with late invoices than larger firms.

 These new findings underpin the need to move quickly to crack down on late payments. The research also found that there was a clear imbalance between big and small firms, and that administrative errors are a major factor in creating slow payments with 24% of firms saying that invoices being incorrectly handled added to delays.

The government will work closely with small and large businesses as well as groups such as FSB and Enterprise Nation to discuss what further measures can be considered to crack down on late payments while ensuring we strike the right balance and avoid excessive burdens on businesses.

Tina McKenzie, Policy Chair at the Federation of Small Businesses (FSB), said:

“This is what real change looks like. Listening to small firms and prioritising action to tear down each and every barrier to growth.

“The Business Secretary has clearly recognised the importance of eradicating bad payment culture, which so devastates the UK supplier base and holds back growth. This series of actions today – including the crucial steps being taken to deliver on Jonathan Reynolds' commitment on audit committees – shows the Government is rightly focused on delivery and working in partnership with the business community.

“There will be so many decisions the Government needs to get right, early – an actively pro-small business budget, a good industrial strategy and tackling late payment. Announcing this programme of work today is a huge confidence boost for the small business community and a clear signal the new Government intends to stand up for small firms.”

Steve Hare, CEO of Sage, said:  

“Late payments continue to challenge small and medium-sized businesses, affecting cash flow and growth. The UK Government's new measures are all positive and show a strong commitment to addressing this issue. We must also focus on technological solutions. E-invoicing, for instance, already used in other countries, reduces late payments by 20% and processing times by 44%, saving small companies an average of £11,300 annually.”  

Oliver Lloyd-Taylor, Founder of Black Milk, which has a Manchester-based café and sells award-winning pistachio & hazelnut spreads, said: 

“As a company we have experienced firsthand the sequential impact of late payments to our daily cash flow - which has, at times, lead us to be late with payments ourselves. We welcome the steps that the Government is making today to help protect small businesses, especially safeguarding them from larger businesses being able to utilise smaller businesses as an overdraft facility.” 

Terry Corby, Founder & CEO of campaign group Good Business Pays said:  

“On the same day that Good Business Pays published our Autumn 2024 Watchlist of Late & Slow Paying companies, it's encouraging to see these new late payment measures being announced.   

Only reputational pressure from organisations like Good Business Pays, supported with appropriate legislation and enforcement from government, will force a change in late payment behaviour. These new measures announced today will go some way to help drive that culture change.” 

Kenny Goodman, co-founder of drinks company Hip Pop said:   

"Late payments can significantly impact small businesses like ours, especially when it comes to maintaining strong relationships with our suppliers. When we're paid on time, we can ensure we do the same for those we work with, which is vital to keeping everything running smoothly.”