The government wants small businesses to be paid on time

Why are late payments bad for business?

The Smart Data Foundry estimates that late payments cost SMEs up to £22k a year, with weeks of lost productivity spent in chasing payments. 

All too often, it’s bigger businesses taking their time paying invoices to smaller businesses -  the invoice may well say payment is due in 30 days but it’s not uncommon for companies to wait 60 or 90 days before they pay up. Or, even worse, they wait until they are threatened with late payment fees.

The impact on already-stretched cash flows is huge and can be the nail in the coffin for struggling companies. According to FSB (the Federation of Small Businesses) research, late payments lead to 50,000 business closures a year.

In every quarter of 2022, 52% of SMEs small firms in the UK suffered from late payments, meaning roughly 2.8 million small companies face this issue, with the FSB describing it as one of the biggest problems facing SMEs.

That’s before we mention the hours of stress and worry for business owners trying to juggle getting invoices paid so they can pay their own bills. Taking all of this into account, it’s no wonder the government rightly describes late payments as the ‘scourge’ of small businesses. 

What are the changes?

The government will consult on tough new laws which will hold larger firms to account and get cash flowing back into businesses. The new Fair Payment Code will hold larger firms accountable to higher standards of payment practices. Through a structured recognition system of Gold, Silver, and Bronze tiers, the code will encourage companies to prioritise timely payments — to get the ‘Gold standard’ companies will need to pay 95% of invoices within 30 days.In addition, new legislation will require all large businesses to include payment reporting in their annual reports - putting the onus on them to provide clarity about how they treat small firms. This will mean company boards and international investors will be able to see how firms are operating. Enforcement will also be stepped up on the existing late payment performance reporting regulations, which require large companies to report their payment performance twice yearly on GOV.UK. Under current laws, responsible directors at non-compliant companies who don’t report their payment practices could face criminal prosecutions including potentially unlimited fines and criminal records. 

What will the impact be for SMEs?

Business Secretary Jonathan Reynolds said: “When the cashflow runs dry, small firms go under, which is why we need to hold larger business to account with their payment practices and foster an environment that supports growth and jobs.” It’s hoped that cracking down on late payments will unlock growth for 5.5 million small firms by letting them invest their time hiring more employees, boosting wages, and exporting around the world, rather than chasing down late payments.

What can you do right now to minimise late payments?

Probably the easiest change to make is to ditch the paper invoices and switch to digital. With an ANNA account you can just ask in the chat interface, ‘Send an invoice to Blake’s Brownies’ and it will be created and emailed to the recipient for you. And, even more importantly, the app will chase the invoice until it gets paid. The result is that 80% of ANNA customers’ invoices are paid within 16 days - keeping cash flow positive with almost zero admin effort.