Charles Purdy
News
Almost 270 British businesses go bust every week thanks to a persistent cashflow problem that flies under the radar.
Late payments are a frequent source of annoyance for small to medium-sized businesses, who are often forced to wait months (or even years) to receive the full balance for certain payments. Many waste time and money chasing bills when they could be growing their business, and although individual invoices are often relatively small, these can add up over time and contribute to the downfall of otherwise healthy businesses.
It is against this backdrop that the UK government unveiled the blueprint for a significant crackdown on late payments back in March. Described as the toughest action in almost three decades, the planned legislation aims to ensure small businesses are paid on time and delays are met with stricter penalties. The question is whether these new rules will work.
The £11bn problem
Whitehall officials estimate that late or missing payments cost the British economy £11bn every year. That’s £11bn directly owed by domestic and international suppliers or customers, representing a significant chunk of GDP and SME liquidity.
Late payments don’t just affect cashflow in the here and now. Not being paid your fair share for your services can gum up future plans for that cash, from reinvesting it in the growth of the business to paying down creditors. So while £11bn may seem like a lot, the true cost to the British economies and the companies that form its beating heart is likely to be significantly higher.
Little recourse against abuse
The current payment system does little to punish sluggish payments and fails to adequately flag repeat offenders. So say many SMEs, at least, who claim the statutory interest rate of 8% above the Bank of England’s base rate on late payments is often overridden by more lax contract terms.
The government’s consultation period revealed just how much larger companies lean on smaller ones when it comes to extended payment windows. Due to their own cashflow considerations, smaller companies often extend the grace period for receiving payments beyond 60 days, creating significant problems should external factors combine to further squeeze cash.
New powers, new punishments
Under the government’s plans, the Small Business Commissioner (SBC) will have expanded powers to investigate repeat offenders and issue multi-million pound fines. The government is looking to seize on the momentum of recent years, when the SBC reclaimed record sums for small businesses.
The reforms would also apply the statutory interest rate on all late payments and prohibit anything below that. They would also cap the window for most payments at 60 days, facilitating the timely payment of all UK SMEs. In sum, the government aims make these guardrails “the toughest in the G7”, cementing cash’s position at the summit of the strategic hierarchy.
“This is real progress, and we’ll keep working with the Government to make sure new laws are brought in as soon as possible”, said Federation of Small Businesses policy chair Tina McKenzie.
The power of cash in action
It is a refreshing change to see the government acknowledge the importance of cashflow in determining business outcomes. Many of the business we work with have struggled with late payments for decades, so we can file this new legislation under ‘better late than never’.
However, any new powers are not expected to come into force until the start of 2027 at the earliest, meaning businesses still have a while to endure under the old system. The government plans to conduct another round of consultations, which could result in material changes to aspects of the plans.
What is clear at this point is that big change is coming to British cashflow. With new requirements for small and large businesses alike, we are available to provide support and guidance to help you navigate these new rules.
