The UK Government Is Cracking Down On Late Payments, But Is It Enough?
The UK government’s crackdown on late payments is, on the surface, exactly what small businesses have been asking for. But is it actually doing enough to support them?
The announcement, described as ‘the toughest action in over 25 years’, introduces new reforms that are designed to help small businesses combat late payments. At present, late payments are costing the UK economy £11 billion annually (gov.uk), so for many business owners, these reforms will be welcomed with open arms.
The truth is, late payments are not just a headache for businesses, they can impact survival. According to government statistics, 38 businesses shut their doors every day because they are not paid on time. And yes, you read that right, every day.
So, what do the reforms include? Well, in short, they provide stronger enforcement powers for the Small Business Commissioner, mandatory interest on overdue invoices and a 60-day cap on payment terms.
The government is clearly trying to send a message: small businesses will be paid on time.
But as with most policies, the reality on the ground is rarely that simple.
A Positive Step…In Principle
My initial reaction is broadly positive. The problem the government is trying to solve is very real.
Big businesses have, for years, used extended payment terms as a form of informal credit at the expense of smaller businesses. In many sectors, that has just become a standard way of doing business.
So, seeing new legislation that directly challenges that behaviour is welcome.
The introduction of mandatory interest – set at 8% above the Bank of England base rate – is especially good to see because it creates a financial consequence for paying late. Until now, businesses could pay late with very few consequences.
Equally, giving the Small Business Commissioner the power to issue big fines, potentially worth millions, is a strong signal that the government is serious about this issue.
But whilst it works in principle, the reality is slightly more nuanced.
The Enforcement Problem No One Talks About
The effectiveness of this kind of legislation depends almost entirely on enforcement.
And enforcement often relies on smaller businesses reporting the larger companies they depend on as customers.
That is a significant ask. And one that many small businesses just won’t be willing to do.
Think about it. If you are a small business whose largest customer accounts for 30, 40 or even 50 percent of your revenue, are you realistically going to report them for late payment? Even if the law is on your side, the risk of damaging that relationship could end up costing your business much more long-term.
This is the core issue in my opinion. The businesses most affected by late payments are often the ones least able to challenge them.
Whilst the government’s reforms aim to crack down on late payments, whether it will actually change behaviour remains to be seen.
Lessons From Elsewhere
It is worth looking at international examples to understand how this might play out.
Australia introduced the Payment Times Reporting Act in 2020, which required large businesses to publicly disclose how quickly they pay small suppliers. The idea was simple: if businesses had to be more transparent, they were likely to be more accountable and pay on time to avoid any kind of public shaming.
In reality, the results were mixed.
It moved the needle a little, but it did not fundamentally change the dynamic for the most small suppliers.
The UK’s approach goes a step further by introducing financial penalties, which could have a stronger impact. But the underlying challenge for small businesses is still the same. For many, the cost of damaging the relationship is far higher than being paid late.
And the businesses that have diversified enough to enforce payment terms are usually the ones who need that protection the least.
Late Payments Are Only Part Of The Picture
Late payments are a real problem, especially in certain industries, but they are often not the main driver of cash flow issues.
The more common issue I see is timing.
Businesses will normally have money coming in, they just may not have it yet.
For those selling goods, they will need to pay for stock, materials, or labour before they receive payment from their customers. That gap between spending the money and getting it back from customers is where the pressure builds.
Late payments definitely widen that gap, but even in a world where every invoice is paid on time, the gap would still exist for most trading businesses – especially those importing from abroad.
What Is Really Driving Cash Flow Pressure Right Now?
Beyond late payments, there are a number of cash flow pressures affecting UK businesses.
Shipping delays and supply chain disruption – driven by global conflicts and changing trade routes – mean businesses are ordering earlier and holding stock for longer. That ties up more cash upfront.
Tax pressure, particularly the recent changes to National Insurance and employer costs, has reduced profit margins and made business owners more cautious.
Energy costs, while no longer at peak levels, have also not fully normalised for many sectors.
And there is a general nervousness around. Many companies are holding onto cash rather than investing it, which creates a kind of system-wide slowdown.
All of this compounds the same underlying issue: cash has to leave the business for a long time before it returns.
Some Sectors Are Feeling It More Than Others
While these pressures are felt by all industries, certain sectors are feeling it more.
Hospitality is having a genuinely difficult time right now. Higher employment costs, energy prices and less consumer spending have created a challenging environment for these kinds of businesses.
Manufacturing and distribution businesses are also stuck dealing with longer lead times, more expensive imports and more capital tied up in transit.
What is interesting is how these pressures flow through the supply chain.
When an importer faces higher costs and longer shipping times, they often cannot fully pass those costs on to their customers. The margin gets absorbed somewhere in the middle, and that is often where smaller businesses sit.
So, Will This Crackdown Actually Work?
The honest answer is: it will help, but it is unlikely to solve the problem entirely.
Even with stronger payment laws, businesses will continue to face timing gaps between spending and receiving income. That’s just how modern businesses run.
For many businesses, the challenge is not just getting paid, it is managing the gap between when money goes out and when it comes back in.
That’s where companies like Plutus step in, we help businesses access financing that genuinely supports how they trade.
My view is that until businesses have access to funding that supports how they actually operate, late payment reforms, however well-intentioned, will only ever be part of the solution.
By Declan Burton-Clark, Founder at Plutus Business Finance
