The £11bn drain: How late payments are strangling Britain’s smallest businesses

Nearly half of SME invoices in the UK are paid late. The cost is not just financial, but structural - and it is getting worse.

Source: gov.uk

Every working day, 38 businesses in the UK shut down - not from a lack of customers, weak demand or insufficient finance to invest and expand, but because they were not paid on time. Late payments now cost the UK an estimated £11bn a year, while 49% of SME invoices are overdue and firms wait an average of 27 days after issuing an invoice to receive payment.

Large corporations use their smallest suppliers as a source of affordable short-term credit, delaying payment not because they lack financial resources, but because they can. The buyer sets the terms, while small suppliers often have little choice but to accept. The delay burdens suppliers, their employees and ultimately the wider economy.

The cost of waiting

A firm waiting 27 days to be paid for work that's already completed cannot fund new equipment, cover any payroll or invest in new technology and research to innovate. In the UK, only 21% of small businesses use AI regularly. Among the barriers preventing wider adoption, 53% of businesses cite cost as the primary concern. The productivity gap between large and small firms becomes harder to shorten when finance that should be available for investment remains tied up in unpaid invoices.

This squeeze spreads through the supply chain where businesses are now taking an average of 37.1 days to pay their own suppliers, up from 31.9 days a year ago. One delayed payment causes another, increasing the cash-flow pressure throughout the economy. Research mentioned by Equifax suggests 82% of business failures are linked to poor cash-flow management. Late payments are not the only cause, but they can turn an otherwise profitable business into one that can’t meet its bills on time.

The government steps in

In May, the King’s Speech introduced the Small Business Protections (Late Payments) Bill. The proposals would cap most payment terms at 60 days, make interest on overdue invoices mandatory and give the Small Business Commissioner stronger powers to investigate, judge disputes and fine persistent late payers.

The risk causes a knock-on effect where Larger firms faced with a compulsory cap may start negotiating with fewer, larger suppliers that are better placed to absorb delays. France’s 2008 Law on the Modernisation of the Economy offers the clearest example. It imposed a 60-day limit on most business-to-business payment terms, and Banque de France data show that payment periods fell sharply as firms prepared for the law. Among small firms, average payables fell from 55.6 days in 2004 to 45.3 days in 2017. For the largest firms, the fall was smaller, from 69.1 to 61.9 days, and around two-thirds still paid late by the end of the 2010s.

The French experience also shows why a cap alone is not enough. London Business School research found that, for hardware retailers, the LME reduced trade credit by 16%, but was followed by an 11% fall in inventory, a 15% fall in revenue and a 3% decline in gross profit. Faster payment helped suppliers, but rigid limits also changed how working capital moved through supply chains. The UK Bill therefore needs tightly limited exemptions and enforcement strong enough to stop large firms shifting the burden elsewhere.

The Late Payment of Commercial Debts Act already gives smaller firms the right to charge statutory interest. However, almost none do because they fear losing the client. The new Bill’s real innovation is not the rule itself, but who enforces it: shifting the burden away from the supplier who risks losing a client by complaining, and towards a commissioner with the power to act. If the commissioner is properly resourced, the legislation might finally solve the market failure it promises to address.