Struggling with late payment and poor payment behaviour? Your rights as a small business and the changes coming soon
It is the most prominent example, but invoices being paid late are not the only example of poor payment practices. Others can include excessively long or extended payment terms, spurious disputes delaying payment, onerous and unnecessarily restrictive contractual clauses. They can also include retention payments and extended payment processes that can be challenging for a small supplier to successfully navigate.
According to the government, ‘late’ payments cost the UK economy around £11bn a year and lead to the closure of 38 businesses every day. But for many small businesses, the challenges can start before an invoice is overdue: they can begin when a larger customer insists on long payment windows, imposes complex approval processes, or uses contractual terms that shift cash-flow risk onto the supplier.
Here we explain the latest government proposals to tackle poor payment practices, your existing rights as a small business and how they will be enhanced. We also consider where to get support, and practical steps you can take to reduce the risk of long, late or unfair payment behaviour damaging your business.
What measures has the government introduced to tackle poor payment practices?
In May 2026, the government introduced the Commercial Payments Bill to Parliament. The government says the bill will create the toughest payment regime in the G7 by addressing not only late payment, but also long payment terms, disputed invoices and unfair retention practices that can leave small suppliers waiting too long for money they have already earned.
New legislation to tackle late, long and disputed payments
New measures include:
- A 60-day cap on payment terms for large firms paying smaller suppliers (with some limited exemptions)
- Mandatory interest on late payments set at 8% above the Bank of England base rate
- A right to compensation where a purchaser raises an invoice dispute late or without enough information
- A ban on deducting or withholding retention payments under construction contracts (subject to further consultation on implementation)
Stronger powers for the Small Business Commissioner
If passed successfully, the bill will give the Small Business Commissioner stronger powers to investigate persistent poor payment practices, adjudicate contractual payment disputes between small and larger businesses, and take enforcement action where larger businesses breach payment law or reporting requirements.
New rules for large businesses on payment reporting
Large companies with poor payment records will face greater transparency requirements. Boards or audit committees may need to publish explanations of why payment performance is poor, what they are doing to improve it, and why previous actions have not been delivered.
What rights do small businesses already have?
Small businesses already have legal protections when customers fail to pay on time. These rights are most useful once an invoice is overdue, but they also provide a benchmark when negotiating terms and challenging unfair payment behaviour. However, even when the law is on your side, it can be very difficult for a small business to take action against a customer – particularly an important one - without jeopardising the commercial relationship. The Small Business Commissioner will be able to take such cases forward on behalf of businesses more effectively in future.
Your right to challenge long or unfair payment terms
Under existing rules, business payment terms should generally be no more than 60 days unless a longer period has been expressly agreed and is not ‘grossly unfair’ to the supplier. In practice, however, what was intended as a limited exemption has become standard commercial practice. The legislation seeks to address this.
As currently drafted, any term in a contract that specifies payment terms longer than 60 days will be void and will default to 30 days. Similarly, if a contract does not specify payment terms, then 30 days will be implied. There are, however, a limited number of exemptions.
Your right to charge interest on overdue invoices
If another business is overdue paying you for goods or services you have provided, you are already entitled to charge statutory interest at 8% plus the Bank of England base rate. But the supplier business will not always choose to do this to avoid damaging a commercial relationship. In future, in an attempt to encourage behavioural change, it will be chargeable automatically.
Claiming compensation for debt recovery costs
On top of interest, you can also charge late-paying clients for the cost of recovering your debt. The amount you can charge depends on how much they owe:
- £40 on debts up to £999.99
- £70 on debts up to £1,000 to £9,999.99
- £100 on debts up to £10,000 or more
What support is available if you face poor payment behaviour?
Help from the Small Business Commissioner
The Office of the Small Business Commissioner (OSBC) has a statutory duty to investigate formal late payment complaints from small suppliers about larger clients. It also provides free advice and support to small businesses dealing with poor payment behaviour, including delayed settlement, disputed invoices and unfair treatment by larger customers.
Visit the OSBC website to enquire about resolving a payment dispute. Note that the OSBC can’t intervene if you’ve already initiated legal action.
Small claims court
If the amount owed is under £10,000, you can go through the Small Claims Court to recover your debt.
You must first try to resolve the matter informally by emailing or calling and offering your client a payment plan. If unsuccessful, you then need to send a Letter Before Action (LBA), alerting them that you intend to initiate legal proceedings if the debt isn’t settled. If they don’t respond, you can file your claim. Court fees range from £35 for recovering amounts up to £300, and up to £455 for recovering amounts between £5,000 and £10,000.
You can also make a claim to recover larger amounts. Fees are 5% of the claim for amounts between £10,000 and £200,000 and £10,000 for amounts over £200,000.
What can businesses do to protect themselves from poor payment practices?
You do not just have to submit invoices and hope for the best. Good contracting practices, disciplined invoicing and early credit control can reduce the risk of long, late or disputed payments and help you spot customers whose processes may put your working capital under pressure.
Agree fair payment terms from the outset
The simplest and most effective way to protect your business is to agree clear and fair payment terms before work begins. Put them in writing, include them in your contract and repeat them on all future invoices.
For the time being, you should pay close attention to clauses that extend payment beyond 60 days. You should also be wary of contracts that make payment conditional on your customer being paid first (so-called pay-when-paid clauses), and those that allow broad set-off rights or so-called ‘unlimited liquidated damages’ clauses that essentially allow a customer to bring unlimited claims against you for the slightest issue with your work.
Also be aware of contracts that impose excessive approval stages or give the customer a long period to dispute an invoice. Look out for clauses that can restrict the financial options available to you to support your working capital – measures that seek to restrict you from using the debts owed to you (your receivables) to access invoice finance or asset-based lending, for instance. If the contractual terms shift too much working capital risk onto you, negotiate them before signing or consider whether the customer is worth the risk.
If a customer seeks extended payment terms, complicated sign-off processes, pay-when-paid style wording or clauses that make payment dependent on unreasonable conditions, you should always consider whether those terms are commercially acceptable before you sign.
Further information on the finance options that might be appropriate to your business is provided on this website and also by the government’s Business Growth Service and the British Business Bank.
Reduce friction in invoicing and payment processes
When submitting invoices, double-check the purchase order number, legal entity, dates, descriptions, VAT details and any customer-specific portal requirements. Large companies often use automated accounts payable systems, so small errors can lead to rejection, re-routing or avoidable delays. Ask for the correct invoicing process upfront and confirm who can approve payment if the invoice becomes stuck. check the purchase order number, legal entity, dates, descriptions, VAT details and any customer-specific portal requirements. Large companies often use automated accounts payable systems, so small errors can lead to rejection, re-routing or avoidable delays. Ask for the correct invoicing process upfront and confirm who can approve payment if the invoice becomes stuck.
In addition to the Commercial Payments Bill, the government has also signalled that e-invoicing will become mandatory in the UK from 2029; the introduction of e-invoicing will help with a lot of delays relating to compliance and process.
Watch for tactical disputes and onerous process requirements
Some poor payment behaviour appears as ‘process’ rather than outright refusal to pay – so-called ‘slow payment’. Examples include disputes raised only when an invoice falls due, repeated requests for information already provided, shifting approval requirements, or insisting that suppliers use portals that have the effect of delaying acceptance of valid invoices. Keep a written record of each step so you can show when the goods or services were delivered, when the invoice was submitted and when any dispute was first raised.
Keep records and follow up early
Keep copies of contracts, purchase orders, invoices, delivery confirmations, portal submissions, dispute notices and email correspondence that proves what is owed and when it is due. This evidence is useful if you need to escalate the issue internally, complain to the OSBC or consider legal action.
If a deadline is approaching, follow up before the invoice becomes overdue and ask whether there are any issues preventing payment. If a customer raises a dispute, ask them to set out the reason, the amount in dispute and the information they need to resolve it. Accounting software with automated invoicing and reminders can help you stay consistent and escalate earlier.
Final thoughts
Poor payment practices can put serious pressure on your cash flow long before an invoice is technically late. Long payment terms, onerous clauses, tactical disputes and burdensome approval processes can all leave small businesses effectively supporting the working capital of their larger customers.
Existing legislation gives you the right to charge interest, claim compensation for debt recovery costs and seek legal help through the courts. The Commercial Payments Bill will introduce maximum terms and, perhaps more importantly, provide stronger and more realistic mechanisms to challenge poor payment behaviour. It will also include tougher reporting requirements for big businesses and greater enforcement powers for the Small Business Commissioner.
If you are currently struggling with late, long or unfair payment practices, the key is to understand your rights, negotiate fair terms before work begins, keep detailed records, seek support early, understand what financial options might be available to support you, and put processes in place to reduce the impact on your business.
