The end of the late payment norm?

Late payments have long been one of the most frustrating (and damaging) realities of running a small business in the UK. 

Now, after years of pressure from industry groups and business owners, the government has announced what it describes as the “toughest laws on late payments in the G7”. 

For many SMEs, this is long overdue. The government estimates late payments cost the UK economy £11 billion every year, with around 38 businesses forced to close every single day because they don’t receive the money they’re owed on time.

And for the businesses that survive, it amounts to more than just lost revenue: it means delays to hiring, stalled investment, and, in many cases, business owners being forced to cover shortfalls by dipping into their own pockets.

According to the Federation of Small Businesses (FSB), more than half of SMEs deal with late payments regularly, with invoices often stretching 60 to 90 days beyond agreed terms. That’s money already earmarked for wages, stock, rent, or tax, effectively turning small firms into unwitting lenders.

What’s actually changing?

At the centre of the reforms is a significant upgrade to the powers of the Small Business Commissioner.

Until now, the role has largely focused on guidance and dispute support. But, under the new rules, it will gain the ability to investigate poor payment practices, enforce decisions, and issue fines worth tens of millions of pounds for repeat offenders.

It’s a major shift that’s designed to rebalance the power dynamic between small suppliers and large clients.

Alongside this, several key measures aim to tighten payment behaviour across the board:

• A 60-day maximum payment term for large companies paying small businesses (delays will potentially trigger fines)

• Mandatory interest on late payments, set at 8% above the Bank of England base rate

• A requirement for contracts to include statutory interest on overdue invoices

• Plans to ban retention payments in construction, protecting firms from losing money due to insolvency or withheld funds

Individually, none of these ideas are entirely new. But, taken together, they represent a meaningful escalation and a positive step in the right direction.

Why this matters for SMEs

In theory, small businesses already have the right to charge interest on late payments. The reality is that in practice, many don’t.

There’s a simple reason: relationships matter. When income is concentrated among a handful of clients, and future work depends on keeping them on side, enforcing penalties or adding interest can feel like a risk, even when it’s justified.

That’s where these reforms could make a real difference. By mandating interest and setting clearer boundaries, they remove some of that pressure from SMEs to rock the boat. Late payment penalties will become the default, not the exception.

The introduction of a 60-day cap is also significant. While many small businesses would prefer 30-day terms, having a firm ceiling is a clear move towards standardising expectations.

That said, these changes won’t fix the problem overnight.

Payment culture is unlikely to shift instantly, so enforcement will be key. A lot will depend on how actively the Small Business Commissioner uses its new powers, and whether large firms genuinely feel the consequences of their poor payment behaviours.

There’s also the reality that many SMEs will continue to face cashflow gaps in the short term, especially while the reforms bed in.

What small businesses can do now

Even with stronger protections on the way, building financial resilience is essential. A few practical steps can help reduce the impact of late payments:

• Tighten your invoicing processes: Clear payment terms, prompt invoicing, and consistent follow-ups can prevent delays before they start.

• Use tools to smooth cashflow: A business credit card or overdraft can help cover short-term gaps while waiting for payments, without having to rely on personal finances.

• Build a buffer where possible: Setting aside cash into a business savings account during stronger months can provide breathing room when payments slip.

A step in the right direction

For years, late payments have been treated as an unfortunate norm: something small businesses have simply had to deal with. But these reforms signal a much-needed change. 

By strengthening enforcement and setting clearer rules, the government is acknowledging that late payment isn’t just bad practice: it’s a systemic issue that needs fixing. 

For SMEs, that’s undoubtedly good news. But the real test will be whether these measures translate into faster payments in the real world. If they do, the impact could be transformative: better cashflow, fewer closures, and more time spent growing businesses, rather than chasing what’s already owed.