Government Backs SMEs with New Late Payment Plan

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The government has unveiled a major small business support package to clamp down on larger companies making late payments to SMEs for goods and services.

Around 2.8 million small firms in the UK are struggling due to invoices being paid late, with some having to take out loans secured on their home to cover the shortfall.

The new Fair Payment Code will push businesses into paying faster in order to be awarded official FPC status - a public hallmark of their reliability and trustworthiness. Other companies can check whether peers have achieved the status before deciding whether to deal with them.

What issues does late payment cause?

Efficient cashflow management is an important part of every business’s success, but for SMEs and the self-employed, it can mean the difference between keeping afloat or folding. On average, small and medium enterprises are losing £22,000 per year due to other businesses failing to pay for their products and services in a timely manner.

Research by the Smart Data Foundry and the Federation of Small Businesses suggests a staggering 50,000 UK businesses close down annually because late payments make it impossible to carry on due to a lack of funds.

A study by Intuit Quickbooks suggests 56 million hours of productivity are lost in the UK every year, slowing the economy’s growth, because many SMEs can’t carry on trading when there isn’t a steady stream of income.

Late payments can lead to a cashflow gap, making it difficult or impossible to pay wages, suppliers and bills and leading to an inability to invest and grow. In severe cases, SMEs are having to reduce salaries, bonuses and commission, leading to low morale and productivity among staff.

Research by the Department for Business and Trade suggests payment problems increase throughout the supply chain, with each small business experiencing issues and being unable to fulfil obligations.

The FSB figures suggest 52% of SMEs fall victim to late payments, with the study describing it as “one of the biggest problems” that UK small traders face.

How will the Fair Payment Code work?

Unveiling the new Fair Payment Code initiative, Business Secretary Gareth Thomas MP said he was optimistic this “big step” would pave the way for changes that would help SMEs to thrive and grow the economy. The government plans to work closely with businesses of all sizes and with traders’ organisations, including Enterprise Nation and the FSB, to discuss further action to clamp down on late payments.

Launching the initiative with Prime Minister Sir Keir Starmer and Secretary of State for Business and Trade Jonathan Reynolds MP, Mr Thomas said new rules on company reporting, a major consultation exercise and the improved Fair Payment Code would combine to tackle the issues.

Mr Reynolds is visiting struggling food and drink businesses in the north west to gauge their views on what would help. The new laws will target larger firms who aren’t paying their invoices on time, requiring them to report all their payments annually.

The onus will be on large businesses to detail their treatment of SMEs so that investors and company boards will see how they are operating. The government will also step up enforcement action on companies who are consistently late payers.

Directors of companies who fail to report payment practices can be subject to criminal prosecutions. The penalties include unlimited fines and having a criminal record, which can impact future company directorships.

The consultation will also consider a range of further policy measures that could help address poor payment practices. The government estimates the crackdown will aid growth for 5.5 million SMEs in Britain, enabling them to hire extra employees, increase wages and boost worldwide exports.

Currently being finalised through consultation, the new proposals are part of Labour’s manifesto commitment to help businesses.

SME financial management

Helping financial management for SMEs is something Labour pledged to tackle in the run-up to the general election on 4th July 2024. Sir Keir Starmer spoke of backing small businesses by “unlocking their barriers to growth”.

At the initiative’s launch, he reiterated how late payments were “at the heart” of SMEs’ problems, costing them “tens of thousands of pounds” and being one of the main reasons they collapsed. The government has promised a raft of measures to help including reforming business rates, reducing trade barriers and helping more small firms to export.

The legislation will include a requirement for businesses to prove they meet good standards before being granted the official code status. Firms that don’t achieve the status may find themselves at a disadvantage when doing business in comparison with companies with a proven track record.

They can be awarded gold, silver or bronze status, depending on how well they adhere to the new rules, letting fellow businesses, suppliers and customers find out whether they’re meeting timely payment standards.

To attain the gold award, businesses must pay their invoices within 30 days.

Small business reactions

There has been a generally positive response to the initiative, with Tina McKenzie, the Federation of Small Businesses’ policy chair, describing it as being “real change” that will help to “tear down every barrier to growth”.

Steve Hare, CEO of business software provider Sage, said as well as addressing late payments through these “positive measures”, it was important to focus on modern technological solutions, such as e-invoices, which reduced processing times by 44% and late payments by 20%.

Terry Corby, who founded campaign group Good Business Pays, publishes regular lists of slow and late paying companies. He said pressure from campaign groups, backed by government legislation and enforcement, would “force a change in late payment behaviour”.

How will it impact small businesses?

The new legislation will help SMEs to keep up-to-date and accurate financial records, rather than experiencing an unexpected shortfall due to late payments. This can protect jobs and enable company investment and growth.

Businesses who are struggling financially are increasingly turning to a small business accountant to help balance the books. Nine out of ten companies have used an accountant’s services at some point in the past 12 months, with 49% doing so at least once a week. An accountant can provide important financial tips for small businesses, such as efficient tax planning and cashflow management, which are critical to survival and growth.

The new laws will increase the powers of the Small Business Commissioner, who will be able to investigate breaches based on anonymous information and intelligence. In addition, more advice will be provided for SMEs on negotiating payments and going digital to help them get paid more quickly.