Late payment has long been one of the biggest threats to cashflow for UK businesses. For small and medium sized enterprises in particular, unpaid invoices can quickly become an existential issue rather than a minor inconvenience. The government has now made clear that it intends to take a tougher stance on late payment practices, with reforms aimed at strengthening protections for suppliers and improving payment culture across the UK economy.
For business owners, contractors and suppliers, this shift presents both opportunities and risks. Understanding what is changing and how to respond contractually and strategically is essential. This article explains the direction of travel and what UK businesses should be doing now to protect their cashflow and reduce disputes.
The government has announced plans described as the toughest crackdown on late payments in a generation. While some measures are still being developed, the direction is clear. Large businesses will face increased pressure to pay suppliers on time and to be transparent about their payment practices. There is a renewed focus on strengthening the Prompt Payment Code and improving enforcement mechanisms where businesses repeatedly fail to meet agreed terms.
Alongside this, there is growing emphasis on empowering smaller businesses to challenge late payment without fear of commercial retaliation. This includes proposals to give greater weight to payment behaviour when awarding public contracts and to introduce stronger reporting obligations for larger organisations.
For SMEs, contractors and suppliers, these reforms are significant. Late payment is not simply a contractual issue. It directly affects working capital, staffing decisions, tax liabilities and long term viability. While the reforms are aimed at changing behaviour at the top end of the supply chain, smaller businesses must still take active steps to protect themselves. The law will not automatically resolve poor payment practices unless contracts and enforcement strategies are properly aligned.
Protecting cashflow through stronger contracts
One of the most effective ways to guard against late payment is to ensure that contracts are drafted with clarity and commercial realism. Many disputes arise not because payment is disputed in principle, but because the contract allows too much ambiguity around timing, triggers or consequences.
Clear payment terms are essential. Contracts should specify when invoices may be issued, the exact payment deadline and the method of payment. Avoid vague language such as payment within a reasonable time. Precision reduces scope for delay.
Interest and recovery costs should be addressed expressly. The law already allows businesses to claim statutory interest and compensation under the Late Payment of Commercial Debts legislation, but contracts can reinforce this position and act as a deterrent. Properly drafted clauses signal that late payment will carry consequences and that the business is prepared to enforce its rights.
Suspension rights are another valuable tool. Including a right to suspend services or deliveries where invoices remain unpaid can be highly effective, particularly in ongoing commercial relationships. This shifts leverage back to the supplier without immediately escalating to litigation.
Finally, ensure that contracts reflect the commercial reality of the relationship. Overly aggressive terms that are never enforced can undermine credibility. A solicitor can help strike the right balance between firmness and practicality.
When legal action is commercially sensible
Despite best efforts, late payment disputes will still arise. The key question for many businesses is not whether they can take legal action, but whether they should.
Early legal advice can often prevent escalation. A well drafted solicitor letter before action can prompt payment where informal chasing has failed. It demonstrates seriousness and ensures that any future claim complies with pre action requirements.
Court proceedings may be appropriate where the debt is undisputed and payment is persistently withheld. For straightforward debts, the court process can be efficient and cost effective when approached strategically. However, litigation should always be assessed through a commercial lens. The size of the debt, the solvency of the debtor and the impact on ongoing relationships must all be weighed carefully.
Alternative dispute resolution can also play a role. Mediation or negotiation may preserve valuable commercial relationships while still achieving payment. The key is knowing when flexibility is beneficial and when firm enforcement is required.
Importantly, delaying action can weaken a business’s position. Allowing late payment to become the norm often encourages further delay. Taking timely, proportionate legal steps can improve recovery rates and deter repeat behaviour.
Preventative drafting and practical steps for businesses
Beyond individual contracts and disputes, businesses should take a proactive approach to payment risk management.
Regular contract reviews are essential, particularly where standard terms have not been updated for several years. Legal reforms, market conditions and business priorities change, and contracts should evolve accordingly.
Credit control procedures should be aligned with contractual rights. This includes prompt invoicing, systematic follow up and clear internal escalation points. Even the strongest contract is ineffective if invoices are issued late or not chased consistently.
Businesses should also be cautious about accepting onerous payment terms imposed by larger counterparties. While commercial pressure is real, agreeing to excessively long payment periods can create serious cashflow strain. Legal advice can help identify unacceptable risk and suggest alternatives.
Finally, documentation matters. Keeping accurate records of contracts, invoices, delivery and communications strengthens enforcement options if a dispute arises. Many payment claims fail not because the debt is invalid, but because evidence is incomplete.
Conclusion and next steps
The government’s renewed focus on late payment reflects a broader recognition that poor payment practices damage the UK economy. For businesses, this is a timely reminder that cashflow protection must be taken seriously at both contractual and strategic levels.
While reforms may improve the overall payment culture, they do not remove the need for clear contracts, decisive action and informed legal support. Businesses that prepare now will be best placed to benefit from the changing landscape and to avoid unnecessary disputes.
If your business is affected by late payment or you want to strengthen your contracts and credit control processes, specialist legal advice can make a measurable difference. Penerley’s business solicitors advise SMEs, contractors and suppliers on commercial contracts, debt recovery and dispute resolution. Contact us today to discuss how we can help protect your cashflow and support your business growth.
