Late payments: how this phenomenon is affecting UK businesses

November 29, 2023

Government efforts to curb late payments

This year marks the twenty fifth anniversary of the Late Payments & Commercial Debt (Interest) Act, introduced in 1998 and intended to deal a death blow to the late payment phenomenon which has plagued the UK economy for decades and continues to kill more businesses than any other single factor, apart from bad management.

It is also now fifteen years since the Prompt Payment Code (PPC) was introduced to the UK in 2008 as a voluntary code of practice, administered by the Office of the Small Business Commissioner.

Amid a rising clamour from the business community for more decisive government action, the Department for Business and Trade (DBT) announced a series of proposals in October 2023 aimed at improving the situation. The  Department then followed up with a more detailed review paper in November 2023. The new measures focus heavily on improving transparency and making the worst late payer culprits more visible.

How bad is the late payment situation?

There has been a quite extraordinary deluge of research into late payments published in recent months, the results of which are not all entirely consistent but which show an overall deteriorating trend in recent times. Headline conclusions include:

The ripple effect through the business food chain

All research into late payments identifies SMEs as the major victims and large businesses as the main perpetrators. This analysis may be factually accurate, but it masks a more complex reality that SMEs are caught in the middle of this phenomenon and are forced to transfer at least some of their cash flow pain down to their own, often even smaller suppliers.  The self-employed, freelancer community suffers particularly badly and have the least leverage in trying to extract payment from their clients.

Which sectors suffer most from late payments?

The accounting software house, Xero publishes a Small Business Index which covers various aspects of SME performance including late payments. Their latest report identifies manufacturing as the sector experiencing the worst late payment issues. It also notes that construction and retail which had previously performed better are now seeing a deterioration in Q3 2023 compared to H1 2023. These two sectors are especially exposed to the recent surge in interest rates. Another sector complaining about bad payment practices is the road haulage industry.

What more could the government do to curb late payments?

The latest initiative by the government is worthy and welcome, but long on voluntary persuasion rather than enforcement, an approach which demonstrably has been largely ineffective, despite some improvement in payment times in the past decade.

There may be a glimmer of hope of stronger medicine for persistent payment laggards. It seems the ongoing late payment threat facing UK businesses is now so bad, it has even caught the attention of Westminster. According to recent polling, almost two-thirds of MPs support the introduction of a compulsory Prompt Payment Code (PPC) to protect SME cash flow.

However, this late in a parliament and so close to the next general election, action in the short and even medium term is unlikely even if the government could be persuaded to endorse this change.

What can businesses do to help avoid late payments?

The simple answer is to be more efficient at sending out and then more effective in collecting their invoices to customers and clients, difficult as this can be in practice. Credit management has to be tough and should not be sidetracked by the fears of sales and marketing departments about scaring away customers. Reviewing credit control procedures on a regular basis is a sensible strategy, as is getting the opinion of independent credit risk experts from time to time. It’s worth remembering that every overdue invoice is a potential bad debt.

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