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Late payment has been a thorn in the side of small businesses for decades. For many, it’s far more than an administrative headache. It can mean struggling to pay staff, falling behind on essential bills and, in the worst cases, being forced to close the doors altogether.

Now, the government is promising a major shake-up.

The new Small Business Protections Bill, formally known as the Commercial Payments Bill, has been introduced to Parliament in what ministers describe as the toughest crackdown on late payments in more than 25 years.

With stronger enforcement powers, mandatory interest on overdue invoices and a proposed 60-day cap on payment terms for large businesses dealing with smaller suppliers, the legislation could significantly change the commercial landscape.

But what exactly is changing, and what does it mean for businesses?

Late payments: a problem the government can no longer ignore

Late payment remains one of the biggest challenges facing smaller businesses across the UK.

According to government figures, approximately 38 businesses close every day because they’re not paid on time. That’s 266 businesses every week, highlighting just how damaging poor payment practices have become.

The wider economic cost is estimated at £11 billion annually.

For smaller businesses, cash flow is critical. Unlike larger organisations, they often lack the financial reserves to absorb lengthy payment delays. Employees still need paying, suppliers expect their money and operating costs continue regardless of whether customers have settled their invoices.

The reality is that smaller suppliers can end up effectively financing much larger businesses simply because they have little negotiating power.

The new Bill is designed to tackle that imbalance and make timely payment a much more serious commercial obligation.

The 60-day payment cap: an end to excessive payment terms?

One of the most significant proposals is a new 60-day cap on payment terms imposed by large businesses when paying smaller suppliers.

Long payment terms have become an uncomfortable feature of commercial relationships, particularly where smaller businesses are dependent on securing contracts with larger organisations.

In some circumstances, suppliers have little choice but to accept lengthy payment arrangements if they want the work.

The proposed cap aims to prevent large companies from imposing excessive delays, giving smaller businesses greater certainty over when they can expect payment.

For businesses already operating on tight margins, this could make a substantial difference to financial planning, investment and day-to-day operations.

Mandatory interest on late payments

The Bill also proposes mandatory interest on late commercial payments, set at 8% above the Bank of England base rate.

This is an important development because it seeks to make late payment more costly for businesses that fail to settle invoices on time.

Rather than allowing larger organisations to benefit from holding onto money for longer, the proposed changes would introduce a stronger financial consequence for failing to pay on time.

The message is straightforward: late payment shouldn’t be treated as an acceptable business practice.

Small Business Commissioner given new enforcement powers

Perhaps one of the biggest changes is the proposed expansion of the Small Business Commissioner’s powers.

Under the Bill, the Commissioner will be able to investigate poor payment practices, adjudicate disputes and impose financial penalties on persistent late payers.

Those penalties could potentially reach tens of millions of pounds for the worst offenders.

This could prove particularly important for smaller businesses that are reluctant to challenge larger customers over unpaid invoices for fear of damaging commercial relationships or facing expensive legal proceedings.

The Office of the Small Business Commissioner has already recovered more money for small businesses in the last year than during the previous four years combined.

The proposed reforms could significantly strengthen its ability to tackle persistent offenders and provide businesses with a more accessible route to addressing payment disputes.

Construction industry faces changes to retention payments

The construction industry is also set to see significant changes.

The government intends to take action to ban the practice of withholding retention payments under construction contracts.

Retention payments have traditionally allowed a proportion of contract money to be withheld as security against defects or incomplete work. However, they’ve also created considerable cash-flow difficulties for contractors and subcontractors.

Smaller construction businesses can find themselves waiting extended periods for money relating to work they’ve already completed.

The proposed intervention aims to address this imbalance and prevent retention practices from continuing to place smaller businesses under unnecessary financial pressure.

Corporate accountability: boards will face greater scrutiny

The legislation also seeks to bring payment practices into the boardroom.

Boards or audit committees of large companies with persistent late-payment problems will be required to publish explanations of their payment performance and outline the steps being taken to improve it.

This is an interesting development because it moves responsibility beyond finance departments and procurement teams.

Where a company repeatedly fails to pay smaller suppliers on time, senior management will increasingly be expected to explain why.

Greater transparency could also create reputational pressure for businesses that have allowed poor payment practices to become part of their commercial culture.

What happens next?

The Bill builds on the Late Payment of Commercial Debts (Interest) Act 1998, strengthening a legal framework that’s been in place for more than 25 years.

The government’s ambition is to establish the strongest late-payment framework in the G7.

However, introducing legislation is one thing. Making sure it works in practice is another.

The real test will be whether the new enforcement powers are used effectively, whether persistent offenders face meaningful consequences and whether smaller businesses feel confident enough to rely on the protections available to them.

For now, the Small Business Protections Bill has been introduced to Parliament, and its progress will be worth watching closely.

One thing is clear: businesses shouldn’t have to spend hours chasing money they’re already owed. If these proposals become law in their intended form, the days of treating late payment as simply another cost of doing business could finally be numbered.