The government has launched a review into tackling late payment for small businesses amid concerns that the current cost-of-doing-business crisis, combined with rising late payments, could push many over the edge.

Delayed payments to small businesses is a longstanding problem. New research recently showed that late payments continued to rise in September. The government estimates that small businesses are currently owed outstanding payments totalling £23.4bn.

Small businesses routinely struggle to receive payment on time from businesses they supply, leading to cash flow problems, jeopardising their future and preventing them from growing. 

But the problem is now more acute given the economic backdrop of rising input costs, high inflation and households tightening their belts due to soaring living costs.

The Prompt payment and cash flow review, which coincides with the Small Business Saturday campaign’s 10th anniversary, aims to ensure that small businesses across the UK receive payment on time. The review will also examine current payment reporting regulations and the Prompt Payment Code. Also within the scope of the review is the role of digital accountancy platforms in tackling late payments.

Business Secretary Grant Shapps said: “That many small firms are routinely paid late is intolerable and presents a real barrier to productivity, the creation of high-skilled jobs and ultimately economic growth.

“While we crack on with this work, I also want to remind big businesses of their duty to ensure their smaller suppliers are paid promptly.”

The role of finance, particularly how major banks and innovative lenders can help small businesses manage their cash flow, and identifying barriers to accessing finance will also be part of the review’s remit. 

The government will also carry out a statutory review of the Small Business Commissioner to consider both its role and effectiveness. Details of this will be published shortly, the government said.

Liz Barclay, Small Business Commissioner, recently told ICAEW that it was uncertain whether new legislation would fix the problem of late payments in the immediate term, given the lengthy nature of creating new laws and enforcing those laws on the 5.6 million companies in the UK.

Simon Gray, Head of Business, ICAEW, said: “We’ve been here before, but it’s really starting to become a problem again. Businesses are facing pressures; costs are rising, and as ICAEW’s Business Confidence Monitor is telling us, domestic sales are falling. As a result, there’s a squeeze in the middle on working capital, and one of the ways you manage working capital is you chase debt faster and pay your suppliers slower.” 

David Webb, Director at Edwards Chartered Accountants, questioned the benefit of any legislative reforms, arguing that it is ultimately down to a commercial relationship and the need for big businesses to meet supplier payment terms.

“It doesn’t matter what legislation is brought in, the onus has got to be placed on the larger corporates to toe the line, particularly these days. If they don’t look after their suppliers then they won’t have a supply chain,” Webb said.

Webb suggested that government and regulators could force large businesses to disclose in their company accounts how often they have breached payment terms to their suppliers to shine a light on the problem.

“Bigger corporates need to be made more accountable in their published figures on how they treat their suppliers, and be made to say if they have breached supplier agreements,” Webb said.

However, ICAEW’s Gray said late payment was affecting organisations of all sizes. “The problem is cited as being a big company, small company thing, but I think it’s across the board. 

“If businesses get paid late, they have to pay their suppliers late and then the whole thing ripples through the supply chain.

“I hear from businesses that banks are more reluctant to lend to consumer-facing businesses. This isn’t just an issue of late payments. This is an opportunity to review opportunities to access finance for small businesses.”

ICAEW members have seen a rise in debtor days with some of the biggest customers paying by cheque “going back to the old days of keeping cheques in a drawer to improve cash flow”. With credit issues rippling through the supply chain, ICAEW members have said that in January and February next year we may see a rise in insolvencies as cash flow dries up, with the retail and hospitality sectors most likely to bear the brunt.

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