Late Payment Reform Needed Before UK Small Businesses Cease to Exist

By Andreas Mjelde, Co-founder and CEO, Two

As many as 50,000 British businesses shut their doors each year due to one pervasive issue, which costs SMEs an average of £22,000 annually and drains 56 million hours of productivity. The culprit? Late payments.

This growing crisis is destabilising UK firms at an accelerating rate, inducing cash flow insecurity and diverting valuable time that could otherwise be spent on innovation and growth. Reform that encourages legislative and private-sector coordination, with modern payment infrastructures, can no longer be viewed as merely optional: it must be made requisite.

The Scale of the Crisis

The macroeconomic implications are worth noting: the Office of the Small Business Commissioner found that if small businesses were paid on time, the British economy could see an estimated £2.5 billion annual boost. Yet, 52% of UK SMEs (roughly 2.8 million businesses) suffer from excessively lengthy payment delays. Considering that SMEs make up 99.2% of all firms in the UK, account for 61% of private sector employment and contribute half of the nation’s GDP, the gravity of this issue cannot be overstated. Alarmingly, the problem is worsening: 1 in 4 small businesses reported an increase in late payments quarter-over-quarter last year.

For smaller companies operating on tight margins, the average 8.4-day wait for invoice processing and the 30.5-day wait for payment can be devastating. With 36% of micro businesses reporting less than three months of cash reserves, these delays threaten their ability to pay bills, invest in growth, and meet their financial obligations. Beyond cash flow issues, late payments often force SMEs to seek external credit – a process that comes with egregiously high interest rates or outright rejections if invoices are still pending.

Industry and Regional Distinctions

Specific industries are more susceptible to inefficient payment structures, especially those dependent on multi-tiered supplier chains and retention payments. Construction and manufacturing are particularly vulnerable, but transportation and storage are also significantly affected. Despite some industry-based disparities, there is minimal discrepancy across different regions: between 50-56% of SMEs in Northern Ireland, Scotland, and most of England report experiencing late payments. Only Wales fares slightly better, with 45% of businesses affected.

Solutions

While the UK government has sought to combat this intrinsic issue with consultations and incentive schemes, such as the New Fair Payment Code (which recognises businesses that have met high payment standards), these measures fall short of addressing the root cause: the outdated, inefficient B2B payment infrastructure.

Equally, there is a dearth of regulatory protection and private sector credit facilitation for small firms and the self-employed that are affected, mainly consigning these enterprises to bankruptcy and closure.

More robust reforms are necessary. Legislative changes, such as those proposed by the Federation of Small Businesses (FSB), could make a substantial difference. For example, requiring large companies to report payment practices in their annual reports would increase transparency and accountability. Companies with poor payment histories could be barred from claiming certain tax reliefs or receiving public funding.

Meanwhile, the retention payments that so endemically plague the construction industry should be limited to the maximum 30-day standard and the notional value of the contract they represent. Additionally, empowering the Small Business Commission (SBC) to disbar repeat late payers from public contracts would create stronger incentives for prompt payment.

We are now nearly a quarter of the way through the 21st century, and the complexity and archaicism of the net-terms payment process remain in the same stagnant status as they did fifty years ago. Promoting digitised services and applications that automate the order-to-cash process and facilitate upfront payments is imperative. In fact, the FSB even recommends that Innovate UK fund private sector innovation to endow small corporations with ways to cope with late fees.

Unlocking the money in a business-to-business contract without delay may seem like an illusory fantasy, but investing in the effort to make such change happen will bolster growth for the entire country and prevent the extinction of the bedrock of the British economy: the small business.