The UK government has introduced new measures to support small businesses and the self-employed by tackling the pervasive issue of late payments. This problem costs SMEs an average of £22,000 per year and contributes to 50,000 business closures annually. Late payments remain one of the biggest challenges facing small businesses, with 52% of small firms affected each quarter.
The government’s new measures aim to hold larger businesses accountable for their payment practices. These steps include:
- A consultation on new laws to ensure payments are made promptly and larger firms are held to account.
- New legislation requiring large businesses to include payment reporting in their annual reports, providing transparency on how they treat small suppliers.
- Stepped-up enforcement of existing payment regulations, with non-compliant companies facing criminal prosecution, unlimited fines, and potential criminal records for responsible directors.
These new measures are intended to create a culture shift in how large firms handle their payment obligations, unlocking growth opportunities for the UK’s 5.5 million small businesses.
AAT’s response to the new measures
Jonathan Gorvin, Executive Director of Strategy and Compliance at AAT, responded positively to the government’s announcement:
“Every quarter, 52% of small firms in the UK suffer from late payments, costing SMEs £22,000 a year and leading to 50,000 business closures annually. It’s a very real problem that devastates the growth and survival of thousands of small businesses. We’ve long called for large businesses to be held accountable for paying their suppliers on time.
“The new measures announced by the Government are a stride forward in supporting SMEs to tackle the issue of late payments. It’s positive to see the upcoming legislation requiring large businesses to include payment reporting in their annual reports. Alongside enforcement actions against businesses that promote a late payment culture, rewarding those that meet good payment standards is another crucial step forward. We hope the new Fair Payment Code, replacing the Prompt Payment Code, will drive the change in behaviours needed.
“But let’s be clear: late payments are just one of many issues the Government needs to address. For example, SMEs should not be further burdened by the risk of debanking, a practice that has increased by 44% between 2022 and 2023. Furthermore, the Treasury must help SMEs access alternative financing platforms to release funds quickly, and we support the Federation of Small Businesses’ recommendation to allow more approved lenders into the Bank Referral Scheme.”
Practical tips from Liz Barclay, Small Business Commissioner
Getting paid requires effort, organisation, and often persistence.
I’ve done it, and I’m sure I’m not alone. I’ve celebrated the new piece of work that’s been offered and forgotten to ask the all-important questions: what do I need to do to get paid fast, and when will the money be in my bank account?
If you’ve just set up your business or decided to branch out and go freelance, you’ve got a clean sheet of paper, so this is your chance to avoid my mistakes and have all the jigsaw pieces in the right place from the beginning.
Most of us who have taken the plunge and are working for ourselves, do it because we love what we do. What we don’t necessarily love is all the paperwork and processes that should go alongside that, and we fail to create a professional operation where the business bit is given the same priority as the creative bit.
Getting paid fast and fairly is the most important aspect of your business and worth getting right before you do anything else.
If you don’t get paid it’s a hobby not a business.
If you don’t get paid quickly, you could run out of money before the next job comes along.
If you can’t manage your cash flow, you’ll have to borrow or go bust.
It’s not just you who is depending on you getting paid quickly and fairly – it’s your family, employees and their families, and your suppliers.
If you don’t get paid quickly and fairly, you won’t know how much you can invest in your business: better equipment, updated skills, better wages, and materials for the next job.
Key practical steps to ensure you get paid quickly
1. Open a business bank account
Too many of us get paid and then think about the need for a separate self-employed business bank account. It can take a while to get it operating, and in the meantime, we get paid (if we’re lucky), put the money into the personal account, and then carry on operating that way.
Legally, you can use your personal bank account for both business and non-business transactions, but your bank’s terms and conditions may prohibit you from using a personal account for business transactions. There may be costs associated with using a business account, but there are also benefits with lots of advice and support available from most banks when you need it. It’s also easier to do your accounts if you keep your business transactions separate from your household transactions.
2. Take advantage of technology
Research software packages or apps that take the time and effort out of preparing invoices and getting payments in. There are lots of options, so this will take quite a bit of time, but it’s worth the effort. Using the best small business accounting software for invoices and payments, or the human bookkeeper equivalent if you prefer, can save you a lot of time that you can dedicate to planning your business rather than chasing missing payments. Again, there are costs involved, but think investment rather than costs, and the time saved (one business tells me he saves half a day a week) could be used to find new customers.
3. Get yourself up to speed with contracts
Every detail of the work and the payment terms should be written down in case there is a disagreement later. There will be a contract even if it isn’t in writing, but if it’s not written, what’s been agreed is very difficult to pin down. You could end up in a costly time-consuming dispute. If you are presented with a convoluted, legalistic contract and told to sign it, refuse to sign until everything has been clearly explained, and you are sure what you are signing and are prepared to accept. You can ask for changes to be made.
4. Be prepared to negotiate better payment terms
If the customer says you will be paid as per their standard payment terms, ask what their standard payment terms are. They may mean that, as standard, they pay suppliers 120 days after they deliver the work. You need to know that. You may need to be paid much sooner.
Be prepared to push back. That can be scary because you feel that the bigger customer has all the power and will simply give the job to someone else, but you may not be able to pay all your own bills and have an income if you have to wait 120 days to be paid. You may be better off turning down the work and finding customers who pay much quicker. Thirty days after the work is delivered is fair. Have the confidence to push back.
5. Put robust processes in place
You need to get correct invoices to your customers at the right time, to be able to check that payments arrive on the due date, and to chase up missing payments quickly.
How do you want to be paid? Make it as easy as possible for the customer to pay you. Don’t give them reasons not to pay. Mistakes give customers excuses not to pay. If there are mistakes on invoices you submit, by the time you chase up the payment, realise there’s a mistake on the invoice, and resubmit the invoice, you’ll be treated as if you’ve just submitted the invoice and have to go through the whole waiting period again. Make sure the details of your bank or other payments options are on the invoice. No one is going to ring you up and tell you there’s a mistake or ask for your bank details.
6. Before you accept each new piece of work, get all the details
Despite all the preparation, every customer will have their own processes for paying suppliers. Find out what information each customer needs on the invoices, how do I get a purchase order number if one is required, and what is the due date for the payment (is it 30 days after the invoice is submitted or 30 days from the beginning of the month after the invoice has been submitted?). A good customer will have an induction pack setting out all the information you need clearly and giving you a person to contact in their firm if you have any queries or if a payment isn’t made on time.
Find out who makes the payments. The person who gives you the work is highly unlikely to make the payments. You need to know who that is and to form a good working relationship with them. It helps if they know a bit about how your business operates. It can be tempting to want to appear to be running a bigger business than you really are, but if you go down that route, the person who ‘signs the cheques’ can be forgiven for not realising that your payment of £300 is more important to you and your business than the payment of £30,000 is to the much bigger firm with bigger reserves. After you submit the invoice, check with them that it’s correct and has all the information they need. Check about two weeks before payment is due that the money will be paid into your account on time. Make it difficult for them to go home on a Friday and forget to pay you.
7. If the payment is late, chase it up straight away
The longer you leave it, the harder it will be to chase. We hate doing it, so we put it off. We keep giving it another day and another day
