How to Crack Down on Britain’s Late Payment Crisis
Founders used to be builders; now they’re debt collectors. Here’s what needs to change.
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When the Labour government finally finished its public consultation on late payments in October, entrepreneurs cautiously welcomed a solution to an issue that has plagued business for the best part of a quarter of a century. Late payments cost the UK economy £11bn a year and force 38 small businesses to close every day, according to recent government figures. That’s almost one business every 40 minutes that goes under because they couldn’t get paid for work they’d already done. These figures are a massive blot on the UK’s reputation as a startup hub.
The government’s reforms could change this. If implemented, they would cap payment terms at 60 days and require companies to dispute invoices within 30 days or pay in full. More importantly, they would give the Small Business Commissioner (SBC) the power to fine repeat offenders. For the first time, there would be real consequences for paying late. But legislation is only the first step. What we really need is a broad cultural transformation in which we begin viewing late payments as serious business misconduct rather than standard practice.
As all founders and operators know, late payments result from the profound power imbalance between large businesses and small suppliers. Large companies know small suppliers can’t afford to lose their business, so they stretch payment terms to 60, 90, or even 120 days, using these invoices to prop up their own cash flow. Meanwhile, small businesses’ more vulnerable and erratic cash flows take a hit, undermining their creditworthiness and, therefore, their ability to access finance. Banks end up offering less favourable loan conditions, including higher interest rates and smaller loan amounts. This creates a vicious cycle that only a few entrepreneurs can escape.
Research by the Small Business Commissioner, conducted in July, suggests that business owners spend an average of 86 hours chasing debt. At any given time, businesses in this country are owed an estimated £26 billion in late payments, with an average of £17,000 per affected business. These figures are enough to deter any aspiring entrepreneur looking to start, run, and grow their business in a country where founders spend more time chasing debt than building their business.
This problem only gets worse as the economy declines. Broader economic strains on the supply chain, namely rising energy, inflation, and wage costs, mean larger firms are incentivised to use late payments as a cash flow management tool. For example, under the current rules, businesses can dispute invoices just before the payment deadline to artificially extend their timeline. No wonder invoices have, regretfully, come to be referred to as “interest-free loans” or “unarranged overdraft facilities” in some circles.
Entrepreneurs increasingly feel powerless to act. A survey of 2,000 small businesses commissioned through the Federation of Small Businesses (FSB) and conducted by GoCardless in March, showed that half of SMBs consider late payments an ‘inevitable cost of doing business’ and 32% feel they have little to no control over managing them. Normalising this fatalistic outlook is corrosive to the UK’s ambition to compete with the US and the EU, as founders look to more supportive business environments abroad. The EU itself is currently revising legislation under its Corporate Sustainability Reporting Directive, treating large companies’ behaviour towards smaller suppliers as an ESG issue.
The backlash from big business to the reforms has already begun. Three months after the government’s announcement, the Financial Times reported that the government was considering rowing back on some of its pledges following lobbying by big business. They argued that a squeeze on their cash flow would harm investment in the economy. The government would do well to note the SBC’s research, which suggests that paying small businesses on time could yield an economic benefit of £2.5bn. After all, the government can’t expect to extract more from the economy whilst strangling companies that have the potential to generate the most growth.
Despite big-business pushback, the government must stand firm. For too long, successive governments have played hot potato with this issue, which stands in stark contrast to their pro-growth pledges. Entrepreneurs must be able to focus their time and energy on building their business rather than chasing debts.
When the Labour government finally finished its public consultation on late payments in October, entrepreneurs cautiously welcomed a solution to an issue that has plagued business for the best part of a quarter of a century. Late payments cost the UK economy £11bn a year and force 38 small businesses to close every day, according to recent government figures. That’s almost one business every 40 minutes that goes under because they couldn’t get paid for work they’d already done. These figures are a massive blot on the UK’s reputation as a startup hub.
The government’s reforms could change this. If implemented, they would cap payment terms at 60 days and require companies to dispute invoices within 30 days or pay in full. More importantly, they would give the Small Business Commissioner (SBC) the power to fine repeat offenders. For the first time, there would be real consequences for paying late. But legislation is only the first step. What we really need is a broad cultural transformation in which we begin viewing late payments as serious business misconduct rather than standard practice.
As all founders and operators know, late payments result from the profound power imbalance between large businesses and small suppliers. Large companies know small suppliers can’t afford to lose their business, so they stretch payment terms to 60, 90, or even 120 days, using these invoices to prop up their own cash flow. Meanwhile, small businesses’ more vulnerable and erratic cash flows take a hit, undermining their creditworthiness and, therefore, their ability to access finance. Banks end up offering less favourable loan conditions, including higher interest rates and smaller loan amounts. This creates a vicious cycle that only a few entrepreneurs can escape.
