Proposal in UK Could Help Small Businesses Avoid Late Payments from Larger Firms

By Sierra Campbell, Managing Editor for small.news

(small.news) — Large companies in the United Kingdom that don’t pay suppliers on time could eventually face fines under a new government proposal that is set to help small businesses.

According to the BBC, draft proposals show that invoice terms could also be limited to two months, and eventually dropping to 45 days in five years. Business Secretary Jonathan Reynolds shared this proposal, showing research that claims thousands of small businesses fail each year due to these late payments.

Opposition parties did welcome this, however, they claimed that the larger firms were suffering due to National Insurance rises. The UK government says that this proposal would be the biggest change in payment rules since firms gained the opportunity to charge interest on late invoice payments in the 1990s.

Government Research: 1.5M Small Businesses Have Been Affected by Late Payments

According to research done by the UK government, around 1.5 million small businesses have been affected by these late payments, with around £26 billion owed at any time. This is especially difficult for small firms, which normally don’t have as much in cash reserves and are more affected by the time they have to waste to chase late payments.

As he unveiled the plan, Reynolds claimed that late payments were the “number one issue” that small business owners raised. The new proposals would allow the small business commissioner to fine companies who are late on payments.

This would apply to any company that has more than 250 employees, with these companies already being forced to report their average payment time semi-annually. One government policy paper suggested that these companies would be fined if they didn’t pay a quarter of invoices on time within that six-month window.

The fines would equal double the amount that these companies owe their suppliers in interest for late payments, which is currently 8% plus the Bank of England base rate.

Current Payment Limits and How They Could Change

Right now, any commercial invoice is due within 60 days of the invoice being sent, but some companies can ask for a longer payback period if the supplier agrees to the terms and the ask isn’t “grossly unfair.” The business department claims that this has allowed these larger firms to have longer payment terms with smaller suppliers, with the small suppliers feeling obligated to agree.

The business department also claimed that removing this ability would address the “negotiating imbalance between small and large businesses.” The 60-day limit could be reduced to only 45 days within five years to “further improve business cashflow.”

Andrew Griffith, who is a conservative shadow business secretary, said this change is welcome, however, businesses are currently suffering from a “full-on strangulation of employment red tape” under Labour. He also disagreed with the decision to raise employers’ National Insurance, saying it’s a “£25 billion jobs tax,” according to the BBC.

Liberal Democrats in the UK also criticized that rise, saying that smaller firms had been affected by the increase. Sarah Olney, a business spokesperson, said the government needs to have a “proper plan” for companies, like “fixing business rates and cutting sky-high energy bills.”