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The new Fair Payment Code, introduced by the UK government in January 2025, is designed to tackle the longstanding issue of late payments, particularly benefiting small businesses.
However, it significantly impacts large companies by imposing stricter standards, greater transparency, and direct accountability measures.
Here’s how the Fair Payment Code specifically affects large companies:
1. Mandatory Payment Timelines
Large companies must now adhere to stricter payment deadlines when dealing with small businesses.
Specifically, to achieve the highest “Gold” status under the Fair Payment Code, large companies must pay at least 95% of all invoices within 30 days. This requirement places significant pressure on firms accustomed to longer payment cycles.
Impact:
- Forces large firms to revise internal payment processes and workflows.
- Requires investment in efficient invoicing and payment systems, potentially increasing operational costs initially.
Benefit:
- Improved supplier relationships and reputation.
- Enhanced supply chain stability due to prompt payments.
Public Transparency and Accountability
Under the new Payment Practices Reporting Regulations (PPR), large businesses must publicly report detailed data on their payment timelines and performance twice yearly. Disputes leading to delayed payments will explicitly count as late payments.
Impact:
- Increased public scrutiny of company payment practices.
- Potential reputational risks for businesses consistently failing to meet standards.
- Encourages proactive resolution of disputes and prompt invoice settlement.
Stricter Enforcement and Penalties:
The Small Business Commissioner (SBC) has been granted greater authority to investigate breaches of payment terms. Companies that fail to comply with reporting requirements or consistently breach payment deadlines may face fines, exclusion from government contracts, or even criminal charges against directors.
Impact:
- Heightened legal risks for directors and companies failing compliance.
- Incentivizes senior management to prioritize timely payments as a strategic priority.
Tiered Recognition System (Gold/Silver/Bronze):
Businesses are awarded Gold, Silver, or Bronze status based on their adherence to prompt payment standards:
| Award Level | Criteria |
| Gold | Pay at least 95% of invoices within 30 days |
| Silver | Pay at least 95% within 60 days; aiming for improvement towards Gold |
| Bronze | Pay at least 95% of all invoices within 60 days |
Awards last two years before reapplication is required.
Impact:
- Creates competitive differentiation among large businesses.
- Influences supplier decisions—SMEs likely prefer working with higher-tiered (Gold) firms.
- Higher-tier awards could become prerequisites for securing government contracts or tenders, providing a strong incentive for compliance.
Exclusion from Government Contracts:
Companies consistently paying late will be excluded from bidding on government contracts
Impact:
- Direct financial consequences for non-compliance.
- Encourages large firms reliant on public-sector contracts to prioritize timely payments.
Enhanced Role of Small Business Commissioner (SBC):
The Small Business Commissioner (SBC) has greater authority to investigate complaints anonymously and mediate disputes between SMEs and larger firms
Impact:
- Increased accountability as SMEs have a stronger voice in disputes.
- Large companies face higher scrutiny and potential investigations if repeatedly reported for poor practices.
Summary of Impacts on Large Companies:
In summary, the new Fair Payment Code significantly impacts large UK companies by:
- Mandating shorter invoice payment cycles (95% within 30 days).
- Increasing transparency through mandatory public reporting.
- Introducing stricter enforcement with potential criminal penalties for non-compliance.
- Creating reputational incentives through tiered recognition (Gold/Silver/Bronze).
- Affecting eligibility for government contracts based on compliance levels.
- Empowering SMEs through stronger complaint mechanisms via the SBC.
Overall, these measures will compel large businesses to prioritize timely payments more seriously, invest in better financial management systems, and potentially reshape their relationships with suppliers.
Differences Between Invoice Factoring and Traditional Bank Loans
Invoice factoring and traditional bank loans are two distinct financial tools that businesses use to manage cash flow and access capital. Here are the key differences between them:
1. Access to Funds
- Invoice Factoring: Provides immediate access to cash by advancing a significant portion of the outstanding invoices, typically within 24 hours.
- Traditional Bank Loans: Requires a longer application and approval process, often taking weeks or months to secure funds.
2. Collateral Requirements
- Invoice Factoring: Uses outstanding invoices as collateral, eliminating the need for traditional assets like property or equipment.
- Traditional Bank Loans: Often requires collateral such as real estate, equipment, or other business assets.
3. Credit Requirements
- Invoice Factoring: Focuses on the creditworthiness of the customers (debtors) rather than the business itself, making it accessible to businesses with poor credit.
- Traditional Bank Loans: Primarily assesses the creditworthiness of the business, making it challenging for businesses with poor credit to qualify.
4. Debt Creation
- Invoice Factoring: Does not create new debt on the business’s balance sheet since it involves selling existing assets (invoices).
- Traditional Bank Loans: Creates new debt that must be repaid with interest.
5. Flexibility
- Invoice Factoring: Offers flexibility in choosing which invoices to factor and when, allowing businesses to manage cash flow as needed.
- Traditional Bank Loans: Typically requires a fixed repayment schedule and may not offer the same level of flexibility.
6. Costs
- Invoice Factoring: Charges a fee based on the invoice amount, usually ranging from 3% to 5%, although this can be higher depending on a number of factors.
- Traditional Bank Loans: Charges interest rates that can vary widely based on creditworthiness and market conditions.
7. Repayment Terms
- Invoice Factoring: Repayment is tied to customer payment; the factor collects directly from customers.
- Traditional Bank Loans: Requires regular repayments from the business, regardless of customer payment status.
8. Industry Suitability
- Invoice Factoring: Commonly used in industries with long payment terms, such as construction or manufacturing.
- Traditional Bank Loans: Suitable for a broader range of industries and business needs.
In summary, invoice factoring provides quick access to cash without creating debt, focusing on customer creditworthiness, while traditional bank loans offer longer-term funding but require collateral and a stronger business credit profile.
