Late Payments Are Hurting my SME – What Can I Do?

For small and medium-sized enterprises (SMEs), late payments can be more than just a financial headache—they can spell disaster. Cash flow is the lifeblood of any business, and when customers delay payments, the knock-on effects can be devastating: bills pile up, payroll becomes stressful, and growth opportunities are missed. That’s why we say “cash is king”. Unfortunately, late payments are a widespread issue for many UK SMEs, but there are steps you can take to tackle the problem and, critically, changes the government could implement to help protect businesses like yours.

At Black and White Accounting, we work with SMEs across the UK, and we know just how damaging late payments can be. In this blog, we’ll cover strategies to help you get paid on time, and what we think the government could do to tackle this growing crisis for UK businesses.

Why Are Late Payments Such a Big Issue?

For SMEs, cash flow is everything. Unlike larger companies that may have reserves to fall back on, SMEs are often reliant on prompt payments to cover their own operating costs. According to recent statistics, 50% of UK businesses experience late payments, and it’s estimated that around £23.4 billion is tied up in overdue invoices across the country.

Here’s why late payments can be so damaging:

1. Cash Flow Strain: When your cash inflow is disrupted, it becomes harder to pay suppliers, employees, and even your tax bills on time;
2. Missed Growth Opportunities: Late payments can stop you from investing in opportunities to grow your business—whether that’s hiring new staff, expanding services, or marketing your offerings;
3. Increased Borrowing Costs: Many SMEs turn to credit to cover gaps in their cash flow caused by late payments, leading to increased debt and higher interest costs; and
4. Stress and Uncertainty: Constantly chasing payments can lead to stress for business owners and a strained relationship with clients, further impacting long-term partnerships.

What Can You Do to Combat Late Payments?

As a business owner, you’re not powerless when it comes to late payments. Here are several strategies to help you get paid faster and maintain a healthy cash flow:

1. Clear Payment Terms from the Start

One of the easiest ways to ensure prompt payments is to set clear, concise payment terms from the outset. Make sure your payment terms are well-defined on every contract and invoice. This can include payment due dates, penalties for late payments, and any discounts for early payment. Shorter payment terms will also help you be paid sooner.

2. Invoice Promptly and Regularly

The sooner you send an invoice, the sooner you can get paid. Avoid delays in issuing invoices and ensure that they’re detailed and easy to understand. Automating your invoicing process through accounting software can help you issue invoices quickly and reduce errors that may cause payment delays.

3. Follow Up on Overdue Payments

Don’t be shy about chasing overdue payments. A polite yet firm follow-up email or phone call can remind clients of their obligations. You can even automate reminders through your accounting software to ensure follow-ups happen on time.

4. Incentivise Early Payments

Consider offering early payment discounts to encourage clients to pay before the due date. A small discount—say, 2% off if they pay within 7 days—can be enough to motivate clients to pay faster.

5. Enforce Late Payment Penalties

Introduce late payment penalties in your terms and conditions. While it may feel awkward to enforce these, the threat of late fees can be a powerful motivator for customers to pay on time. It is a real cost to your business, so why not pass it onto your customers causing this?

6. Use Invoice Financing or Factoring

If late payments are crippling your business, you might consider invoice financing or factoring. These services allow you to sell your unpaid invoices to a third-party company at a discount, giving you immediate cash flow. While it involves a cost, it can help ease the cash flow strain when waiting on delayed payments. This can be a quick solution, but it needs to be a short-term solution, otherwise it will just hurt your profits going forward which could start a downward spiral.

7. Legal Action as a Last Resort

In extreme cases, you can consider legal action. This might be through the UK’s Small Claims Court, which can help you recover unpaid debts up to £10,000. However, this should always be a last resort, as it can damage business relationships and result in additional costs.

What Can the Government Do to Help SMEs?

The UK government has recognised the problem of late payments and has introduced measures aimed at tackling the issue. However, more can be done to provide SMEs with the protection they need to thrive.

Here are some actions the government could take:

1. Strengthen the Prompt Payment Code

The government’s Prompt Payment Code encourages large companies to pay their suppliers on time. While it’s a good initiative, it’s currently voluntary, meaning compliance isn’t guaranteed. Making the code mandatory for large companies—particularly those working with SMEs—could help ensure smaller businesses get paid faster.

2. Introduce Penalties for Late Payments

Currently, businesses can claim statutory interest on late payments, but it’s rarely enforced. If the government introduced more significant financial penalties for companies that fail to pay SMEs on time, it could act as a stronger deterrent and improve payment practices.

3. Create a Late Payment Regulator

Establishing a dedicated late payment regulator could provide SMEs with a clear avenue for recourse when dealing with persistent late payers. A regulator could oversee disputes, enforce penalties, and promote best practices to ensure fairer payment terms across all sectors.

4. Greater Access to Finance

To help SMEs manage the cash flow crunch caused by late payments, the government could improve access to low-cost finance. Expanding the availability of government-backed loans and simplifying the application process for SME financing could give businesses more breathing room when waiting on late invoices.

5. Improving Digital Tax and Accounting Tools

By continuing to expand Making Tax Digital (MTD) and encouraging more businesses to adopt digital tax and accounting tools, the government can help SMEs better track their cash flow and identify late payments more quickly. A more transparent digital system would also make it easier for businesses to pursue unpaid invoices through official channels.

The Bottom Line: Late Payments Don’t Have to Be the End

Late payments may be killing your SME now, but there are strategies you can use to tackle the problem head-on. By setting clear payment terms, following up on overdue invoices, and exploring financing options, you can take control of your cash flow. However, there’s only so much businesses can do on their own. It’s time for the UK government to take stronger action to support SMEs and ensure a level playing field when it comes to payments.

At Black and White Accounting, we understand the challenges that late payments bring. We work with SMEs across the UK to help them streamline their processes, chase overdue invoices, and manage their cash flow effectively. If late payments are affecting your business, get in touch with us today—we’re here to help you find solutions that work for you.

Get in Touch: Is your SME struggling with late payments? Contact us today for expert advice on managing your cash flow and staying ahead of the game.