Late payment is no longer a minor commercial irritation. For many small businesses across England and Wales, it is a structural cash flow threat.
A recent survey of 1,000 sole traders and small business owners by Hiscox found that late payments are considered the single biggest cash flow issue facing smaller businesses. Among businesses employing between 10 and 49 staff, 63 percent identified late payment as their primary financial concern.
This is not simply about inconvenience. It is about liquidity, solvency risk and, in certain circumstances, director exposure.
How widespread is the Late Payment problem?
Most respondents reported chasing between 10 and 20 overdue invoices at any one time.
Around one in five invoices are typically paid late. Nearly a quarter of businesses stated that up to 30 percent of payments require chasing.
As business size increases, so does:
• the number of late payments
• the average value of unpaid invoices
• the total amount outstanding at year end
For some businesses employing up to 49 staff, outstanding sums between £10,001 and £20,000 were reported at year end.
That represents working capital removed from the business. For growing companies with payroll, supplier commitments and tax liabilities, that level of shortfall can materially affect operations.
When do Late Payments become a legal issue?
Late payment becomes a legal concern when it affects a company’s ability to pay debts as they fall due.
Under the Companies Act 2006, once insolvency becomes a real possibility, directors must prioritise the interests of creditors. Our guidance on director duties when a company faces financial difficulty explains how this shift in responsibility operates in practice.
If persistent late payments lead to an inability to meet VAT, PAYE or supplier obligations, directors must consider:
• whether the company is cash flow insolvent
• whether continued trading remains appropriate
• whether creditor interests are being protected
Early review does not mean liquidation is inevitable. It means understanding the position before risk escalates.
How are businesses chasing payment?
The report indicates that small businesses commonly:
• send payment reminders
• charge late payment fees
• withhold further goods or services
• arrange direct meetings
Businesses in England and Wales are entitled under the Late Payment of Commercial Debts legislation to claim statutory interest and fixed compensation on overdue commercial invoices.
Where informal steps fail, escalation may involve a formal letter before action under the Pre Action Protocol and, if necessary, issuing proceedings. Our overview of debt recovery options for businesses sets out when court action, statutory demands or more formal steps become proportionate.
The correct route depends on commercial strategy and the financial standing of the debtor.
When does Late Payment trigger insolvency risk?
Late payment rarely occurs in isolation.
If overdue invoices coincide with:
• unpaid VAT
• PAYE arrears
• loan covenant pressure
• landlord demands
the situation can escalate quickly.
HMRC is often the most persistent creditor. Where VAT arrears accumulate, enforcement may progress to statutory demands or even a winding up petition. Directors facing that scenario should understand the process for defending a winding up petition and the urgency involved once a petition is presented.
At this stage, cash flow forecasting becomes critical. Directors should monitor liquidity weekly, not quarterly, where payment delays are becoming routine.
The Fair Payment Code: Will it change behaviour?
The government’s Fair Payment Code replaced the Prompt Payment Code in January 2025 and introduces Gold, Silver and Bronze awards based on promptness of supplier payments.
While many small businesses express optimism about reform, the Code is reputational rather than coercive. It does not remove the need for contractual enforcement where payment is persistently delayed.
Directors should therefore treat policy reform as supportive background rather than primary protection.
Practical steps to reduce Late Payment exposure
To reduce exposure:
• issue invoices promptly and clearly
• define payment triggers precisely in contracts
• use deposits or staged payments for larger projects
• review debtor ledgers regularly
• escalate consistently where patterns emerge
Where cash flow strain becomes sustained, structured advice on company rescue and restructuring options may preserve flexibility before formal insolvency becomes unavoidable.
The earlier options are considered, the wider they are.
The director perspective
Late payment is often framed as a commercial frustration. In reality, it can:
• undermine payroll stability
• trigger HMRC enforcement
• increase borrowing reliance
• expose directors to scrutiny
The key question is not whether invoices are late. It is whether the business can continue meeting liabilities as they fall due.
If that becomes uncertain, directors should seek advice before creditor pressure intensifies.
Conclusion
The Small Business Late Payments Report confirms that late payment is a persistent and growing working capital risk for smaller businesses.
As businesses scale, exposure increases. Outstanding sums become material. Legal and director risks become more complex.
Clear contractual terms, disciplined credit control and early escalation are essential.
Where late payments begin to affect solvency or creditor relationships, early advice can stabilise the position and protect the directors.
