The government has announced a new Fair Payment Code and fresh rules on company reporting as part of a package of measures designed to tackle late payments to small businesses.
The government has unveiled new measures to support small businesses and the self-employed by tackling what it calls "the scourge of late payments", which is costing small businesses £22,000 a year on average and leads to 50,000 business closures a year.
New legislation being brought in the coming weeks will require all large businesses to include payment reporting in their annual reports. The new Fair Payment Code will replace the old Prompt Payment Code. Businesses will need to prove they have met good payment standards and will be awarded either gold, silver or bronze status, depending how often and how quickly they pay their suppliers.
The small business commissioner, Liz Barclay, said: "The new code will reward businesses that treat their suppliers fairly and pay them quickly. It will also include an ambitious new Gold Award which aims to make 30-day payments the new standard for which businesses can aim."
Tackling poor payment practices
A consultation being launched in the coming months will consider a range of further measures that could further tackle poor payment practices.
"Late payments are simply unacceptable and this government is determined to level the playing field for small business. When the cash flow runs dry, small firms go under which is why we need to hold larger business to account with their payment practices. Slashing trade barriers, reforming business rates, getting more SMEs exporting - this government is committed to small firms. We know there's a lot more to be done, but today we are calling time on late payers once and for all." Business secretary Jonathan Reynolds.
New research published by the Department for Business and Trade has found that payment problems multiply the further down the supply chain you go. With delays to payments increasing with each business along a supply chain, this results in smaller businesses generally experiencing more issues with late invoices than larger firms.
"This is what real change looks like. Listening to small firms and prioritising action to tear down each and every barrier to growth … There will be so many decisions the government needs to get right, early - an actively pro-small business budget, a good industrial strategy and tackling late payment. Announcing this programme of work today is a huge confidence boost for the small business community and a clear signal the new government intends to stand up for small firms." Tina McKenzie, policy chair, Federation of Small Businesses (FSB).
Small businesses have also welcomed the news. Kenny Goodman, co-founder of drinks company Hip Pop, said: "Late payments can significantly impact small businesses like ours, especially when it comes to maintaining strong relationships with our suppliers. When we're paid on time, we can ensure we do the same for those we work with, which is vital to keeping everything running smoothly."
However, Roan Lavery, ceo and co-founder of FreeAgent, has raised concerns that the measures don't go far enough. Lavery said: "It's positive to see new legislation for all large businesses that will mean they have to include payment reporting in their annual reports and it's also good to hear that there will be stricter enforcement on existing late payment performance reporting regulations. However, it is disappointing that the new Fair Payment Code, replacing the Prompt Payment Code, will be voluntary.
"We know from our own research that small businesses want tougher implementation of the PPC - with 46% believing it should be mandatory and 56% wanting the small business commissioner to have additional power to take action against those not adhering to it - so I fear any new code will not have sufficient scope to properly deal with the issue."
Unfavourable payment terms for B2B firms
Many small businesses are under pressure to accept unfavourable payment terms to get orders. Research by economic consultancy Cebr and iwoca has revealed that the number of B2B sellers offering at least 60-day payment terms has doubled since 2020 - up from 7% of suppliers in 2020 to 17% in 2024. This comes as more businesses are asking for payment flexibility from their suppliers. More than eight in ten suppliers (84%) say they have to adjust payment terms for business customers.
Written by Rachel Miller.