Late payment is more than an administrative frustration. For small and medium-sized businesses, money arriving weeks or months later than expected can put real pressure on cash flow.
A business can be profitable on paper while still struggling to meet payroll, VAT, tax, supplier and other commitments simply because too much of its money is tied up in unpaid invoices.
The Government’s Commercial Payments Bill is intended to address poor payment practices between businesses and improve the flow of cash through UK supply chains. The Bill is currently progressing through Parliament and has not yet become law.
What is being proposed?
The Bill includes several measures designed to strengthen the position of suppliers.
These include:
- maximum business-to-business payment terms of 60 days, subject to limited exemptions;
- mandatory statutory interest on qualifying late payments at 8% above the Bank of England base rate;
- additional rights where a customer raises a payment dispute late or without sufficient information; and
- stronger powers for the Small Business Commissioner.
The proposed reforms are significant, but businesses should remember that these are not yet the rules in force today.
Why does this matter particularly to SMEs?
Late payment tends to have a greater impact on smaller businesses because they generally have less working capital available to absorb delays.
For example, a business may have:
- completed the work;
- paid employees;
- paid suppliers;
- incurred VAT and other costs; and
- recorded the sale in its accounts,
but still be waiting 60, 90 or even 120 days for the customer to settle the invoice.
The profit exists. The cash does not.
This issue can become even more important when a business is growing. Increasing turnover often means paying for more staff, stock and materials before the related customer invoices are collected.
Without sufficient working capital, growth itself can create cash-flow pressure.
Do businesses already have rights when customers pay late?
Yes.
Current UK rules already give qualifying businesses rights to claim statutory interest and certain debt-recovery costs on late commercial payments.
The new Bill is intended to strengthen those existing rights rather than introduce the concept of late-payment interest for the first time.
Whether a business actually chooses to charge interest is often a commercial decision, particularly where an important customer relationship is involved.
However, overdue invoices should not simply be ignored.
Good credit control starts before the due date
Effective credit control should begin before an invoice becomes overdue.
A sensible process includes:
- agreeing payment terms clearly;
- obtaining purchase order details where necessary;
- invoicing promptly and accurately;
- making sure invoices reach the correct person;
- monitoring due dates;
- following up overdue accounts consistently; and
- resolving genuine invoice disputes quickly.
Businesses should also review their aged-debtor reports regularly.
A customer who generates significant turnover may look valuable, but if they consistently pay late they may also be consuming a disproportionate amount of the business’s working capital.
Know where your cash is tied up
One useful measure is debtor days — broadly, how long customers are taking to pay.
If debtor days increase, a growing amount of cash can become trapped in outstanding invoices.
Business owners should also consider customer concentration.
If one large customer represents a substantial proportion of both turnover and outstanding debt, a payment delay from that customer can have a disproportionate impact on the business.
Management accounts and cash-flow forecasts can help identify these risks before they become urgent.
Cash flow and profit are not the same thing
This distinction is important.
Accounts can show a healthy profit while the bank account remains under pressure.
That is because sales may be recognised before the cash is actually collected.
Good financial management therefore means looking at more than turnover and profit. Businesses should also understand:
- what customers currently owe;
- when those balances are expected to be received;
- what payments the business must make;
- whether borrowing is effectively funding customers; and
- how much additional working capital future growth may require.
Our view
Late-payment reform should provide greater protection for smaller suppliers, but legislation alone will not solve every cash-flow problem.
In our view, SMEs should be confident about chasing money that is properly due to them. Good credit control is part of running a professional business, not a sign that the business is in difficulty.
Very long payment terms can also mean that the smaller supplier is effectively financing its customer. Businesses should therefore consider payment behaviour when assessing the true value of a customer, not simply turnover.
We would encourage owners to review aged debtors regularly and to consider cash-flow requirements alongside any plans for growth. Increasing sales is positive, but if customer payments become slower at the same time, growth can place additional pressure on working capital.
About this article
Written by: We Are Pi Chartered Certified Accountants
Reviewed by: Angelique Wright FCCA
Last reviewed: 15 September 2026
Sources and further guidance: GOV.UK guidance on the Commercial Payments Bill, late commercial payments and statutory interest; UK Parliament Commercial Payments Bill material.
About We Are Pi
We Are Pi is a Buckinghamshire-based firm of Chartered Certified Accountants supporting owner-managed businesses, company directors and individuals with accounting, tax, compliance and business advisory services.
Important information: This article is intended for general information only and should not be treated as tax, accounting, legal or other professional advice specific to your circumstances. Business and legal requirements depend upon individual circumstances, and legislation and guidance can change.
Would you like to improve your business cash flow?
We Are Pi can help review your management information, debtor position, cash-flow forecasting and working-capital requirements to help identify where cash is tied up and what may be required to support future growth.
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