Over the summer, small and medium sized businesses received some good news: the Government announced plans to help them tackle the continuing problem of late payments. It promised to implement “the most significant legislative reforms in over 25 years” to confront what the Federation of Small Businesses (FSB) has found is the most frequent type of commercial dispute faced by small businesses[1], and which Government estimates costs the UK economy more than £11bn per year[2]. We consider the details behind the headlines and explore what this will mean for your business.
What counts as an SME and why this matters
The term ’small and medium-sized enterprises’ or ‘SME’ is frequently used but not always clearly defined. Most commonly, being an SME in the UK does not depend on turnover but refers to businesses with fewer than 250 employees, including self-employed entrepreneurs. Official business population figures estimate that there are about 5.5 million SMEs in our country, making up 99.8% of the entire business population[3].
What these numbers reveal is that SMEs play a vital role in our economy, driving innovation, competition and job creation and significantly influencing almost every part of our daily life and business culture. This means that if the profitability and – sometimes – the continued viability of SMEs is affected by contractual disputes and trade disagreements, which frequently result in late payments, there are potential knock-on effects for other SMEs and consumers.
The scale of the late payment problem
The Government’s plan for SMEs notes that on average SMEs face three “legal issues” per year[4], the majority of which are commercial disputes. Previous research by the FSB found that more than 70% of SME disputes relate to late or non-payment of invoices[5]. The Government’s own research into late payments[6], also published over the summer, notes that over half of SMEs reported an increase in late payments over the preceding six months. Paying late remains a significant and highly detrimental part of UK business culture.
How SMEs currently respond to late payments
Government and FSB research also shows that SMEs only seek professional advice for commercial disputes about 25% of the time because they perceive the civil justice system to be expensive, complicated, and slow. There is an understandable tendency for SMEs to initially chase creditors themselves hoping for swift payment, but the longer it drags on, the more time is taken away from engaging in their own business activities. If the value of unpaid invoices begins to affect cashflow, it may lead to tapping into overdraft facilities or trying to access other forms of credit, such as a loan. In some extreme situations, business owners may feel no choice but to use their own funds to allow their businesses to continue to operate whilst the dispute rumbles on.
What support already exists?
The Office of the Small Business Commissioner was established by the Government in 2016 to provide free support to SMEs to get paid quickly and on time by influencing large businesses and working to raise payment practice standards across the UK. A limitation of this support is that it only applies where a small business with fewer than 50 employees has a dispute with a larger business with more than 50 employees.
In late 2024, the Fair Payment Code[7] was launched to drive further improvements in payment culture among UK businesses. This is a voluntary accreditation scheme that allows businesses of any size to apply for an award tier of either Gold, Silver or Bronze depending on the percentage of all their invoices paid within 30 to 60 days. Until further data is published, it is too early to say whether this scheme has improved payment performance.
Government’s proposed reforms
The Government’s Backing your Business plan for SMEs launched this summer confirmed its commitment to address a range of issues that affect SMEs, including late payments. The plan sets out specific proposals which are now open for public consultation until 23 October 2025. The Government intends these new measures to result in the UK having “the strongest legal framework on late payments in the G7” [8].
Key proposals under consultation
The proposals include:
- Taking further steps to improve public sector payment such as spot checks across supply chains and tightening rules to exclude suppliers who fail to pay promptly from large contracts.
- New legislation that may:
- Limit maximum payment terms to 60 days.
- Provide stronger powers to the Small Business Commissioner including launching investigations, arbitrating disputes and taking enforcement action through penalties.
- Make the payment of interest on late invoices mandatory.
- Fine larger companies who persistently pay their suppliers late.
- Reform or ban cash retentions in construction contracts.
- Increase discussion and scrutiny of the payment practices of large companies at board level.
Precisely how these proposals are formulated and whether they are ultimately adopted or not very remains to be seen.
What does this mean for your business?
If the Government implements its proposals, in theory this will be good news for SMEs struggling with legal disputes and late payments. However, one can also envisage resistance from certain corners of the business community, reluctant to embrace further regulation and any associated costs.
While these proposals continue to be discussed and shaped, there are steps that you can immediately take to help prevent or minimise late payments causing significant damage to your business:
- Know who you are doing business with – do not agree to provide goods or services to a business with a bad credit and payment record.
- Make sure that your contract is in writing, and, if necessary, obtain legal advice to ensure that your terms and conditions suit your business needs, and include allowed interest and compensation for late payments.
- If you already have problems with late or non-payment, do not allow this problem to escalate by unnecessary delay. Put in place a clear credit control plan and contact the customer as soon as invoices fall due.
- If your own credit control processes do not succeed, consider stopping conducting further business with the customer and obtaining legal assistance to help to recover what is owed.
How can we help SMEs facing late payment issues?
Our experienced commercial litigation solicitors understand that legal disputes can divert time, resources, and focus away from your business’s core objectives. We provide straightforward, pragmatic advice on the range of legal options available to you and suggest the best routes to follow, bearing in mind the value of the debt and the nature of the dispute. We have a proven track record of securing clients a satisfactory resolution in commercial disputes through robust negotiation, alternative dispute resolution or litigation, enabling you to keep your focus on your own business.
[1] FSB, TIED UP: Unravelling the dispute resolution process for small firms, November 2016, page 13
[2] Department for Business & Trade, Backing your Business: Our Plan for Small and Medium Sized Businesses, 31 July 2025, page 20
[3] https://www.gov.uk/government/statistics/business-population-estimates-2024/business-population-estimates-for-the-uk-and-regions-2024-statistical-release
[4] Department for Business & Trade, Backing your Business: Our Plan for Small and Medium Sized Businesses, 31 July 2025, page 21
[5] FSB, TIED UP: Unravelling the dispute resolution process for small firms, November 2016, page 6
[6] https://www.gov.uk/government/publications/late-payments-research-impact-on-the-uk-economy
[7] https://www.smallbusinesscommissioner.gov.uk/fpc/the-new-fair-payment-code
[8] https://www.gov.uk/government/consultations/late-payments-tackling-poor-payment-practices/late-payments-consultation-tackling-poor-payment-practices
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
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