Late Payment Crisis Threatens Stability of UK’s Small Business Sector

Many UK small and medium-sized enterprises (SMEs) face a big problem: getting paid late. After finishing a project on time, they might have to wait weeks or months for payment. Between June 2023 and June 2024, nearly half (49.3%) of invoices from small businesses in the UK were paid late, up from 43% the year before.

When payments are delayed, it’s not just a minor hiccup; it can disrupt a company’s entire workflow. Money gets tight, employees might not get paid on time, and expansion plans are put on hold. Late payments can even push otherwise successful businesses to close in extreme cases.

Given that small and medium-sized enterprises (SMEs) form the backbone of the UK economy—constituting over 99% of all private sector businesses—finding a solution to this problem is significant.

So, what steps can UK companies take to shield themselves from the widespread issue of late payments? Let’s dive into this.

Understanding the Late Payment Landscape in the UK

Recently, late payments have become a problem. According to Quickbooks, SMEs have an average of £21,400 in unpaid invoices, and 62% report waiting for payments. This financial strain leads to a loss of £2.5 billion every year.

Several factors contribute to this widespread problem:

• Power Imbalance: Larger companies often use their power to delay payments to smaller suppliers. 

• Economic Uncertainty: Changing market conditions can lead to careful cash management, which can also cause payment delays. 
• Inefficient Invoicing Systems: Using manual processes and lacking automation can result in administrative hold-ups.
• Lack of Enforcement: Even though initiatives like the Prompt Payment Code are in place, participation is optional for many, leaving small and medium-sized enterprises (SMEs) feeling they have little recourse when dealing with larger companies.

Retail and hospitality, known for quick payments, have recently seen increases in late payment times. In retail, payments are now 5.5 days late, an increase of 3.1 days. In hospitality, payments are now 4.4 days late, an increase of 3.0 days.

The Real Cost of Unpaid Invoices

Delayed payments can lead to more problems than just money issues.

• Cash Flow Disruptions: Delayed payments can make it hard for a company to pay its suppliers, employees, and other necessary costs.

• Financial and Productivity Loss: Recent data from Rise Funding illustrates that overdue and unpaid invoices result in a staggering loss of £22,000 annually for SMEs and 56 million hours of lost productivity. Such a long period and financial cost is unreasonable for many small businesses.

• Increased Borrowing: To cover cash flow shortages, businesses might turn to short-term loans, often with high interest rates. 
• Stunted Growth: Limited funds can prevent investment in new projects, hiring, or expansion plans.
• Mental Health Impact: The pressure of chasing payments and dealing with financial uncertainty can stress business owners and employees.

In fact, delayed payments are a big reason 50,000 businesses close annually in the UK.

Smart Strategies to Safeguard Your Business

Taking steps to prevent delays in payments can help reduce the risks involved. Here are some smart strategies to safeguard your business:

• Set Clear Payment Terms: Ensure contracts include clear payment deadlines, penalties for late payments, and accepted payment methods.

• Invoice Promptly and Accurately: Send invoices right after finishing a project or delivering a service. Check that all details are accurate to prevent disputes.
• Leverage Technology: Use accounting software like QuickBooks or FreeAgent to automate invoicing, send reminders, and track payments.
• Offer Incentives for Early Payment: Try offering discounts for early payments or adding late fees to encourage on-time payments.
• Conduct Credit Checks: Check the creditworthiness of new customers before offering them credit terms.
• Request Deposits or Milestone Payments: When tackling more significant projects, think breaking up payments into chunks at different stages to minimise potential problems.
• Seek out professional help: Open communication is key to maintaining healthy client relationships and avoiding late payments. Do not hesitate to follow up as payment deadlines approach. A polite but firm reminder can often prevent delays. If everything else fails, enlist the help of a commercial debt collection specialist. This can not only hurry the recovery process, but also sends a strong message to clients that you’re serious about getting paid.

Building a Culture of Prompt Payment

While strategies and tools are essential, fostering a culture of prompt payment—both within your business and among your clients—can make a long-term difference. Start by setting the tone internally. Train your team to prioritise invoicing and follow-ups as part of standard operations. Encourage finance staff to build rapport with client counterparts, which can smooth future communications.

Externally, educate your clients on your payment expectations from day one. Make your terms visible—not just in contracts, but on your website, proposals, and invoices. Consider creating a simple “How We Work” document that outlines your payment process in a friendly, transparent way.

Ultimately, prompt payment culture is about mutual respect and professionalism. When your business champions this ethos, it not only reduces financial risk but also strengthens your reputation as a reliable, organised partner.

Conclusion

Late payments are a serious issue for small and medium businesses. They can harm cash flow, growth, and sustainability.

However, businesses can tackle this challenge by using effective strategies, adopting technology, and seeking professional help.

Take action to protect your profits and help create a healthier and more reliable trade environment.