Bold plans to tackle one of the greatest threats to small businesses – late payments – has been announced by the government with a raft of legislative reforms.
The proposals, announced as part of the government’s “Small Business Plan”, are intended to give SMEs more powers to stand up to bigger organisations that delay payment as well as freeing up valuable time and resources.
Thrings’ Head of Business Growth, Ramona Derbyshire, takes a look at the proposals, why they matter and what small businesses can do to prepare.
The Small Business Plan
The Small Business Plan is the government’s long-term strategy to support, grow and protect small businesses, creating a fairer and more productive business environment removing barriers (such as late payments) that hold small firms back.
The proposals, which collectively would reportedly see the UK adopt the toughest late payment laws in the G7, include:
- Legal cap on payment terms: Large companies will no longer be able to impose excessively long payment windows in their standard contracts with the cap on payment terms for business-to-business contracts set at 60 days, eventually being reduced to 45 days.
- Mandatory interest on late payments: Charging interest on late payments will no longer be optional, with the rules to be applied consistently across all business transactions, with strengthened enforcement.
- Stronger powers for the Small Business Commissioner (SBC): Currently the SBC provides advice and mediation but only has limited enforcement authority. This will change to provide statutory powers to investigate suspected poor payment practices proactively and compel information from businesses under investigation. The SBC will then be able to issue fines or penalties to large firms found repeatedly breaching payment rules and order payments and interest to be made directly to affected small businesses.
- Board-level accountability for large companies: Large businesses (typically over 250 employees) will be required to disclose their payment practices in annual reports. Audit committees of public companies will be also required to review and sign off on their company’s payment performance, with the reports being made public.
- Introduction of a New ‘Fair Payment Code’: Replacing the existing Prompt Payment Code, the new scheme will see businesses be awarded a bronze, silver, or gold rating based on their payment behaviour.
As well as the reforms, the government has also announced a £4billion package of government-backed loans which will be made available to new and growing businesses.
Why these reforms matter
These reforms would signal a big shift in favour of small businesses – who employ around 60% of the country’s workforce and generate roughly £2.8trillion in turnover.
According to the government, late payments currently cost UK SMEs around £11billion every year, resulting in around 38 business being forced to close every day.
Freed-up cash flow would mean fewer overdrafts and less time chasing invoices which, for SMEs that spend hours every week following up on unpaid invoices, would enable them to spend more time focusing on their growth.
Preparing for change: What can small business owners do?
The government’s announcement signals change is coming – whether as outlined in the Small Business Plan or changing as it progresses through Parliament.
As such, there are some simple steps business should consider if they want to stay on the front foot:
- Review your contracts and payment terms: Ensure your terms don’t inadvertently allow lengthy payment dates. If you offer shorter terms or early-payment discounts, make them explicit. Confirm you’re not “contracting out” of protections under the Late Payment Act, which allows you to charge 8% interest over base rate, plus fixed compensation fees where an invoice is paid late.
- Sharpen your credit control processes: Start reminding clients a few days before invoice due dates. Use simple systems – diary alerts or automated reminders – to cut down chasing time. If invoices are disputed, aim to resolve them within 30 days in line with the new verification rules.
- Keep records and monitor payment performance: Track which customers pay late and how often – this will guide how you respond. When the Fair Payment Code launches this autumn, you may wish to sign up (and boost your reputation) if you already meet good payment standards.
- Know when to use legal support: If a payment is long overdue – beyond the contract or statutory terms—you may be entitled to interest and compensation under existing law. Thrings’ debt recovery team can help ensure your claim is properly calculated and delivered with force.
- Plan for cultural change: While legislation applies to large firms, growing smaller businesses should prepare to be transparent about their own payment practices – especially as they reach audit thresholds. Establishing fair, predictable processes now sets you up for the future.
Thrings’ Business Growth lawyers draw on expertise from across the firm’s wide range of specialisms to help businesses in all sectors start, grow and thrive with practical, tailored business advice from experienced commercial experts. Get in contact today to find out how they can help turn your vision for growth into a reality.
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