The Growing Problem of Late Payments
Late payments are crippling UK businesses, with devastating effects on cash flow and survival rates. In 2025, business insolvencies are expected to rise and late payments alone are responsible for closing around 50,000 businesses each year.
Many of these businesses are profitable but struggle due to delayed payments from clients, making it impossible to meet their financial obligations.
For SMEs that work with a few large clients and rely on high-value invoices, the risk is even greater. Unlike businesses with many smaller transactions, these SMEs are highly susceptible to cash flow shocks if a key customer delays payment.
The reality is that when one or two large invoices are unpaid, a business can quickly spiral into financial distress.
Why Are Businesses Going Insolvent?
Late payments are a leading cause of business failures, particularly in industries where extended payment terms of 30, 60, or even 90 days are the norm. Recent data shows that the number of businesses paying invoices late has increased by over 57% in the first quarter of 2015, further exacerbating cash flow issues for SMEs. The main reasons behind UK business insolvencies in 2025 include:
- Late Payments from Customers – Businesses lose an average of £22,000 per year due to unpaid invoices, causing severe financial strain.
- Cash Flow Problems – Companies can’t cover essential expenses like wages, rent, and supplier payments due to insufficient working capital.
- Creditor Pressure – Businesses facing cash shortages are unable to meet debt repayments, leading to legal action from creditors.
- Supply Chain Disruptions – Delays in receiving goods or services increase operational costs and cash flow strain.
- Mounting Operational Costs – Rising energy prices, wages, and material costs make it harder to stay profitable.
- Economic Uncertainty & Inflation – Higher costs reduce consumer spending and business revenue, worsening financial difficulties.
What is the UK Government Doing About It?
Recognizing the impact of late payments on SMEs, the UK government has introduced stricter regulations and enforcement measures in 2025 to hold companies accountable for poor payment practices.
Key Government Initiatives to Combat Late Payments
- Stricter Payment Reporting Requirements. Large companies must now publish detailed payment reports twice a year, including how often they pay suppliers late. Disputes will count as late payments, increasing transparency.
- Tougher Penalties for Late Payers Directors of companies that fail to report payment data accurately may face criminal charges, with unlimited fines and the risk of a criminal record.
- Fair Payment Code (Replacing Prompt Payment Code) Businesses will be classified under a tiered system (Gold, Silver, Bronze) based on how quickly they pay their suppliers. Companies with the best payment records will gain “Gold” status, incentivizing prompt payment.
- Government Contract Exclusions Companies with poor payment histories will be barred from bidding for government contracts, ensuring that only businesses with ethical payment practices benefit from public sector work.
- Empowering the Small Business Commissioner (SBC)The SBC has been given greater powers to investigate complaints about late payments and mediate disputes between small businesses and larger firms.
What This Means for SMEs
For SMEs struggling with late payments, these new measures bring more accountability and better protection. The stricter enforcement aims to create a fairer payment culture, ensuring that small businesses receive their money on time and can maintain healthy cash flow.
SMEs should take advantage of these changes by:
- Monitoring their clients’ payment behavior’s – Keep track of which companies are slow to pay and consider working only with businesses that comply with fair payment standards.
- Reporting late payers – With the SBC’s increased powers, businesses now have more avenues to file complaints and seek mediation.
- Exploring alternative finance options – Invoice financing and factoring can help bridge cash flow gaps caused by late payments.
Protecting Your Business from Late Payments
Late payments remain one of the biggest threats to SMEs, causing thousands of preventable insolvencies every year. To find out more about how factoring can help your business or to compare quotes, complete the form below. While the UK government’s 2025 reforms aim to improve payment practices, businesses must take proactive steps to safeguard their cash flow.
One of the most effective ways to mitigate the risk of late payments is to have financing options in place before they become a problem. Invoice financing and factoring provide immediate access to funds tied up in unpaid invoices, ensuring that businesses can cover their expenses without waiting for slow-paying clients. Even if your company doesn’t need financing now, exploring available options can help you stay prepared for unexpected cash flow disruptions.
With tougher enforcement against late payers, SMEs should also use this opportunity to review their payment terms, monitor customer payment behavior, and consider working with businesses that uphold fair payment practices.
By staying proactive, small businesses can protect themselves from the impact of delayed payments and maintain financial stability.
To find out more about how factoring can help your business or to compare quotes, complete the form below. Also check out our AI Factoring Assessment Tool to discover which factoring or invoice financing is best suited to your needs.
