UK Late Payment Rules 2026: What SMEs Need to Know and How to Protect Your Cash Flow
Late payments have long been one of the biggest financial challenges facing small and medium-sized businesses.
A business can be profitable, have a healthy order book and still find itself under pressure simply because customers aren’t paying invoices on time.
Now, significant changes are being proposed.
The Government’s Commercial Payments Bill is progressing through Parliament and aims to introduce some of the strongest protections for small businesses against late payments in the UK. The Bill proposes maximum payment terms, mandatory interest on late payments and stronger enforcement powers for the Small Business Commissioner.
The legislation is not yet fully in force, so businesses should not assume that the proposed rules already apply. However, with the Bill progressing, now is a good time for SMEs to understand what’s being proposed and review their own payment processes.
Why Are Late Payments Such a Problem for SMEs?
Late payments aren’t simply an administrative nuisance.
For a small business, an unpaid invoice can mean money isn’t available to pay employees, suppliers, tax bills or other operating costs.
The Government estimates that late payments cost the UK economy around £11 billion a year, with approximately 38 businesses closing every day as a result of being paid late.
The scale of money tied up in unpaid invoices is also substantial. Research commissioned by the Department for Business and Trade found that around £26 billion in overdue invoices is owed to UK small businesses at any given time.
However, there are some encouraging signs.
Official payment-practice statistics show that the proportion of invoices paid late by large businesses has fallen from 25% in 2018 to 15% in 2025. The average time taken by large businesses to pay suppliers has also decreased.
The direction of travel is therefore positive, but there is still considerable room for improvement.
What Is the Commercial Payments Bill?
The Commercial Payments Bill is designed to tackle late and unfair payment practices between businesses.
It was introduced to Parliament in May 2026 and has since progressed through the House of Lords. Its current version completed Committee Stage in July.
The proposed legislation includes several important measures for SMEs.
A proposed 60-day maximum payment term
One of the headline proposals is a maximum payment term of 60 days for large businesses paying smaller suppliers, subject to limited exemptions.
The intention is to prevent smaller suppliers from being pressured into accepting excessively long payment periods simply because they have less negotiating power.
For SMEs, this could provide greater certainty when agreeing commercial contracts with larger customers.
However, it is important to remember that the 60-day cap is proposed legislation and is not currently a universal legal maximum.
Mandatory Interest on Late Payments
The Bill also proposes making interest on late commercial payments mandatory.
The proposed rate is 8% above the Bank of England base rate, meaning late payment would become more costly for businesses that fail to pay on time.
The Government’s aim is to change the economics of late payment.
At present, businesses can sometimes view paying suppliers late as a convenient way of managing their own working capital. Mandatory interest would make that approach considerably less attractive.
For SMEs, it could provide a stronger financial incentive for customers to pay invoices when they are due.
Stronger Powers for the Small Business Commissioner
Another significant change would be greater powers for the Small Business Commissioner.
The proposed framework would allow the Commissioner to investigate poor payment practices, adjudicate certain payment disputes and impose financial penalties on persistent late payers.
This could give smaller businesses greater support when dealing with customers that repeatedly fail to pay on time.
The Government has described the proposed framework as the toughest late-payment regime among the G7.
What Does This Mean for SMEs?
For small businesses, the proposed reforms could ultimately mean stronger protection and improved cash flow.
But businesses shouldn’t wait for new legislation before improving their credit-control processes.
There are several practical steps SMEs can take now.
Review Your Payment Terms
Look at the payment terms you’re currently offering customers.
- Are they clear?
- Are they commercially sensible?
- Are there customers who consistently negotiate longer terms?
Understanding your contractual position is particularly important if you regularly supply larger businesses.
Invoice Promptly
The sooner an invoice is issued, the sooner the payment clock can start.
Make sure invoices contain everything the customer needs to approve payment, including accurate purchase-order references, descriptions of goods or services and correct payment details.
A simple administrative error can sometimes delay payment unnecessarily.
Monitor Your Debtor Days
Your debtor days can provide an early warning that customers are taking longer to pay. If your average debtor days are increasing, investigate why. It may be a particular customer, a change in payment behaviour or an internal process that is slowing down invoice collection. Regular management accounts can make these trends much easier to identify.
Don’t Be Afraid to Chase Overdue Invoices
Credit control doesn’t have to mean difficult conversations.
A clear process can make following up overdue invoices routine rather than uncomfortable. Automated reminders, agreed escalation points and consistent payment terms can all help.
The important thing is not to allow overdue invoices to become invisible simply because you’re busy running the business.
Cash Flow Is About Timing, Not Just Profit
One of the most important lessons about late payments is that profit and cash are not the same thing.
Imagine a business completes £20,000 of work in August and invoices the customer immediately. The business may record the revenue and profit associated with that work, but if the customer doesn’t pay for 90 days, the business still has to fund its costs in the meantime.
That gap can put pressure on otherwise profitable businesses.
This is why cash-flow forecasting is so important.
A good forecast can help you identify when cash is expected to arrive, when major expenses are due and whether there could be a shortfall.
It gives you an opportunity to act before a cash-flow problem becomes urgent.
Don't Wait for the Law to Change
The Commercial Payments Bill could represent a significant change for UK businesses, but legislation takes time to progress and the final requirements may differ from the proposals currently being considered.
For SMEs, the practical message is much simpler.
Don’t rely on legislation to solve your cash-flow problems.
Review your payment terms. Invoice promptly. Monitor outstanding debts. Understand your debtor days and maintain a realistic cash-flow forecast.
The proposed reforms could provide additional protection in the future, but good credit control is something your business can benefit from today.
And there is reason for optimism. Payment performance among large businesses has already improved significantly over recent years, with the proportion of invoices paid late falling to 15% in 2025.
For SMEs, getting paid on time isn’t just about protecting cash flow. It creates the financial confidence to invest, employ, grow and plan for the future.
Frequently Asked Questions
The Government’s Commercial Payments Bill proposes new rules covering commercial payment terms, late-payment interest, invoice disputes and enforcement. The Bill is currently progressing through Parliament, so the proposed measures are not yet fully in force.
The proposed legislation would introduce a maximum payment term of 60 days for large businesses paying smaller suppliers, subject to limited exemptions. It is important to distinguish this proposed rule from the current legal position.
The Commercial Payments Bill is still progressing through Parliament, so businesses should wait for the final legislation and commencement dates before treating the proposed 60-day limit as a legal requirement.
Under the existing Late Payment of Commercial Debts legislation, qualifying businesses can generally claim statutory interest at 8% above the Bank of England base rate, subject to the relevant rules. The new Bill proposes making interest mandatory in commercial contracts rather than allowing businesses to opt out of statutory interest.
Businesses should establish clear payment terms, issue accurate invoices promptly, monitor outstanding debts, follow up overdue invoices consistently and maintain cash-flow forecasts. Professional advice can also help where a significant or persistent debt is affecting the business.
Clear contracts, accurate invoices, upfront credit checks, defined payment terms and consistent credit control can all help. It is also useful to monitor debtor days so that changes in customer payment behaviour are identified early.
Yes. A business can be profitable but still experience cash-flow problems if customers take too long to pay. Profit measures the financial performance of the business, while cash flow measures the movement and availability of money.
Yes. An accountant can help businesses monitor debtor days, prepare cash-flow forecasts, produce management accounts and identify financial pressure points. This can give business owners greater visibility and help them make informed decisions before cash-flow issues become serious.
