Government Crackdown on Late Payments Drives SMEs Toward Invoice Finance Solutions

Invoice financing allows businesses to unlock working capital quickly by using unpaid invoices as security.

Key Insights

• Late payments cost SMEs £22,000 annually and result in 56 million hours of lost productivity each year.
• Larger companies are often more likely to pay invoices late.
• The government has introduced a crackdown on late payers.
• Poor cash flow from unpaid invoices can spell disaster for medium-sized businesses.
• With invoice financing, businesses can receive up to 90% of their invoice value, often within 24 hours.

In a 2023 study by Payit, over half of SMEs reported an increase in late payments, and 20% admitted to being owed between £5,000 and £20,000 in unpaid invoices. The cash tied up in these invoices harms businesses, but so does the time spent trying to retrieve them. In fact, 31% of all businesses spend between 21 and 30 hours each month chasing payments. This squeeze on cash flow and resources can significantly impact an otherwise successful trading enterprise.

The Size Factor in Late Payments

A troubling correlation exists between business size and late payments. According to the Disputes Register, large companies take, on average, 30% longer than small companies to settle invoices. Some of the worst offenders have average payment terms of 788 days. A 2016 study found that  1 in 5 insolvencies resulted from late payments, and this trend has only worsened. As the costs of labour, materials, and other inputs continue to rise, SMEs face an increasingly difficult landscape.

To access cash quickly and conveniently, many SMEs are turning to invoice finance.

Government Crackdown on Late Payments

In September this year, the government unveiled a package of measures aimed at tackling late payments, which they see as a major brake on growth. research carried out by Intuit Quickbooks revealed that late payments cost SMEs an average of £22,000 each year and result in 56 million hours of lost productivity. The new proposals include:

• A Fair Payment Code: This will replace the old Prompt Payment Code. Businesses must prove they meet good payment standards to receive an official code status, awarded in bronze, silver, or gold based on payment speed.
• Payment Reporting for Larger Companies: New legislation will require larger firms to include payment reporting in their annual reports, particularly how they treat smaller companies.
• Focus on Technological Solutions: Encouraging the use of automated e-invoicing, which has been shown to reduce late payments by 20%, cut processing times by 44%, and save companies an average of £11,300 annually.
• Enforcement of Accountability: Ongoing consultations will aim to ensure larger firms are held accountable for late payments.

However, a key concern remains: will these measures work? Minimising late payments and improving financial reporting requires a cultural shift that may take time—time that struggling SMEs do not necessarily have. This is why invoice finance offers businesses the opportunity to recoup essential funds and reduce the hours spent chasing payments.

What is Invoice Financing?

Invoice financing provides SMEs with the working capital they need. The process involves interest and fees based on your business’s credit history.

In simple terms, your financier buys the debt owed to you by your customers. You receive up to 90% of this amount in cash, allowing you to focus on business growth or cover overheads. The customer then pays your financier directly, and you receive the remaining balance minus any applicable fees and interest.

Invoice financing serves as an alternative to traditional business finance options, such as commercial loans or asset finance, making it an excellent choice for those needing quick access to cash.

How Can Invoice Finance Help?

Invoice finance can release cash that you’ve been waiting for, often within hours. Whether you need funds to invest in machinery, cover overheads, or support other business needs, this financing option can help. While the money may incur some charges, the benefits include:

• Capital for acquisition, expansion, and other business growth.
• Coverage of overheads or debt restructuring/consolidation.
• Improved cash flow reassurance.
• Peace of mind regarding your business’s future.

Is My Business Eligible for Invoice Financing?

Your business may qualify for advance funding against the sales ledger if:

• You’ve been trading for three years or longer.
• You have a turnover of £1,000,000 or more.
• You are an incorporated entity.
• You have proven financial, operational, and reporting systems.

Find out more about our invoice financing options here.

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