Late payments are a constant headache, especially for small businesses where 1 in 3 payments are overdue . In fact, late payments are getting so bad that the government is promoting the Fair Payment Code, a new initiative to overhaul how small businesses get paid and establish fair pay practices.
This change in payment policy couldn't come soon enough for small business owners who are struggling with the cash flow issues caused by late payments–it’s one of the biggest small business problems for SMEs. In 2023 alone, small businesses were waiting on approximately £32 billion in late payments , which contributes to the 50,000 business closures each year in the UK. This dire situation highlights the critical need for improved invoice payments and standardized payment terms in the UK.
So let’s take a look at how the new Fair Payment Code which some are calling a fair payment charter, encourages businesses to treat their suppliers – especially the smaller ones – with the fairness and speedy payments they deserve.
What is the Fair Payment Code? At its core, the Fair Payment Code introduces a tiered award system – Gold, Silver, and Bronze – based on how quickly businesses pay their suppliers (who are mainly small businesses). While it encourages better payment practices for all businesses, regardless of size, it gives small businesses an extra lift as they are hit particularly hard by late payments. This new system is set to revolutionize the payment culture and establish clear payment principles for businesses across the UK.
Here’s what it takes to get the Gold, Silver, or Bronze under the Fair Payment Code:
Gold 🥇: Companies must pay 95% of their suppliers within 30 days.Silver 🥈: Companies must pay 95% of their small business suppliers within 30 days, and everyone else within 60 days. Bronze 🥉: 95% of invoices must be paid within 60 days.This is a major step up from the current Prompt Payment Code (PPC), which only requires 95% of invoices to be paid within 60 days:the equivalent of Bronze in the Fair Payment Code. However, the PPC was later changed to require 95% of small businesses to be paid within 30 days, which was rolled into the Silver tier of the new code. This evolution in payment term news demonstrates the ongoing efforts to improve prompt payment meaning and practices.
So, why is this such a big deal?
Finally, some payment promises with teeth Small businesses are the backbone of any economy. However they rely heavily on getting paid on time to maintain their operations and grow. Late payments can cripple their cash flow, making it difficult to cover expenses, pay employees, and reinvest in the business. The cash flow cycle in the UK is particularly challenging for SMEs due to these payment issues.
Some small business owners have even had to take out loans on their homes just to keep the lights on as they wait months to get paid. This situation often leads to payment disputes and highlights the need for stronger payment regulations.
The Fair Payment Code incentivises businesses to pay faster and fairer. By creating this tiered reward system, the Small Business Commissioner has laid out the terms and set ambitious benchmarks that we’re hoping become the new normal for payment practices. This system also promotes better payment reporting, allowing for increased transparency in business transactions.
It’s refreshing to see a move that acknowledges the long-standing struggles small businesses face that goes beyond mere lip service. The Bronze, Silver, and Gold awards encourage continuous improvement, pushing companies to aim higher and move up the ranks over time, ultimately enhancing their payment performance.
It’s also great for suppliers because the awards give a bit more transparency into what to expect when working with different businesses, at least from a payment perspective. This transparency can help small firms make informed decisions about potential business partnerships and manage their supply chain more effectively.
But there’s more work to do While the new Fair Payment Code is undoubtedly a step in the right direction, it’s important to recognise that it still only addresses part of the problem. Yes, getting paid faster is crucial. But small businesses need more than just quicker payments:they need payments that are easier, cheaper, and streamlined.
For example, even when a small business gets paid within 30 days, high transaction fees can eat into its already slim margins. We need to see further efforts to reduce payment processing fees, increase transparency in invoicing systems, and implement simpler payment management technology.
In short, the journey toward fairer, faster payments doesn’t end with this new code:it’s just the beginning.
Looking ahead: Going for gold 🥇 The Fair Payment Code could inspire larger cultural shifts in how businesses approach supplier payments. As the code rolls out, we hope to see businesses not only meeting the minimum standards for Bronze or Silver but striving to hit Gold.
More importantly, the transparency this creates around payment practices will allow small businesses to make better-informed decisions about who they choose to work with.
Ultimately, this change gives small businesses greater confidence to invest in their growth, knowing that they’ll get paid on time. It’s also a solid win for the small business community, but we continue to hope for additional efforts to reduce payment friction across the board.
At Adfin , we are working on innovations of our own that will build on these new payment standards to change how businesses get paid for the better. The Fair Payment Code is a crucial milestone, but there’s a lot more road ahead, and we’re excited to continue pushing for fairer, faster, and easier payments for all.
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