26th October 2023

Late payments hit three year high

Small businesses in the UK are facing a worsening late payment crisis, with payment times hitting a three-year high.

According to Xero’s quarterly small business index, small firms are waiting an average of 29.4 days to be paid by their customers, with payments in September being made 7.7 days after the due date.

The manufacturing sector has been the worst affected, with payments made 10.1 days late on average.

Industry leaders are calling on the Government to take action and help small businesses with late payments. The Federation of Small Businesses estimates that if late payments were made on time, 50,000 business closures could be avoided each year. The federation is urging the Chancellor to address the issue in the upcoming Autumn Statement.

A recent ​​survey commissioned by the AAT and the ACCA found that MPs want more powers to be handed to the Small Business Commissioner – a body introduced in 2016 to tackle unpaid invoices.

CPA doubts the Small Business Commissioner can change the Late Payment Culture. Businesses need to be motivated financially to pay on time.

We at CPA have long argued that stronger measures are needed and that primarily businesses pay late as late payment of suppliers is currently the cheapest form of cash flow that businesses can use. When suppliers are keen to maintain goodwill, the late payment usually comes free.

CPA argues that the late payment culture will only change when late payment of suppliers becomes the most expensive form of capital. Financial chiefs will quickly change payment practices if late payments hit them in the pocket.

This can be achieved with a simple series of measures.

1. Late payment compensation levels were set decades ago and haven’t been updated for inflation. the current levels of £40 for debts up to a £1000, £70 for debts between £1000 and £10,000 and £100 for debts over £10,000 are woefully inadequate. These rates should be increased to properly compensate late paid suppliers and deter late payers. We would suggest changing the levels to £60, £120 and £200.
2. Still there is the issue of enforce-ability. Take away the pressure of goodwill from small business suppliers and mandate by legislation that all medium and large businesses who pay late must automatically as part of their payment process, add late payment compensation and interest to the payment they make to their suppliers.
3. Provide a simplified process for suppliers to claim late payment compensation and interest via the county courts from small businesses who have paid them late.
4. Current legislation still allows large companies to withhold payments contractually by setting credit terms of up to 60 days.  The perils of unpaid invoices could be reduced by reducing the maximum permissible terms to 30 days, thus speeding up the payment to suppliers.

Introduce the above three measures and the damaging effects of the late payment culture in the UK could be seriously reduced. There would still be the issue of late payments between small businesses and consumers.