Late payments present a significant challenge for small and medium-sized enterprises (SMEs) in the UK, with far-reaching financial consequences. Annually, SMEs incur a financial burden of approximately £684 million due to late payments, with an average delay of 5.8 days. This exacerbates cash flow challenges and often leads to a portion of these payments being written off as bad debt, with up to 7.5% declared as such.

SMEs also spend a considerable amount of time chasing late payments, averaging 15 days per year. This time-consuming process diverts resources from productive activities and growth opportunities. Over half of UK SMEs face negative impacts, including reduced capacity for company investments, meeting supplier obligations, and providing staff bonuses.

New government initiative to combat late payments for SMEs

Alarmingly, 31% of SMEs experience cash flow issues directly caused by late payments, impacting their operational stability and growth potential. In response, the UK’s Department for Business and Trade (DBT) has introduced initiatives to improve the payment culture and mitigate the effects of late payments on SMEs.

SMEs may have limited financial resources; therefore, late payments and bad debt can leave them vulnerable. In 2022, SMEs were owed an average of £22,000 in late payments. The government estimates improving payment practices could boost the UK economy by £2.5 billion annually.

To combat these challenges, the DBT has proposed several measures:

  1. Enhancing Transparency: 
    Extending the Reporting on Payment Practices and Performance Regulations 2017 beyond their 2024 expiration. This requires businesses to disclose payment procedures, promoting transparency and discouraging unfavourable practices.
  2. New Reporting Metrics: Introducing new metrics for businesses to report the value of invoices, including late payments, disputed invoices, and retention payments, particularly in the construction sector.
  3. Empowering the Small Business Commissioner: Proposed legislation to expand the commissioner’s powers, allowing for investigations and public reporting based on anonymous information, improving oversight.
  4. Strengthening the Prompt Payment Code: Businesses will need to reaffirm their commitment to this code every two years, encouraging prompt and fair payment practices.
  5. Enforcing Compliance: Establishing a regime to ensure businesses report their payment data as mandated.
  6. Support and Training for SMEs: Offering advice and resources to help SMEs negotiate payment terms, utilise digital technology for faster payments, and manage cash flow. This includes extending initiatives like Help to Grow and Growth Hubs for SME training.

Conclusion

These measures aim to foster a better payment culture in the UK, providing SMEs with more predictable cash flows, reducing financial instability, and promoting sustainable growth. Given the severe financial impact of late payments, these initiatives are crucial for supporting the resilience and success of UK SMEs.