Dispute resolution briefing: the problem of late payments for SMEs

Small and medium-sized businesses (SMEs) welcomed recent government plans to tackle the ongoing issue of late payments, with proposals described as “the most significant legislative reforms in over 25 years”.

In February 2026, the House of Commons Business and Trade Committee urged the government to prioritise these promises so that changes will be in effect by the end of this parliament. We consider the details behind these headlines and explore what this means for your business.

Which businesses are SMEs and why is this relevant?

An SME is a business with fewer than 250 employees, including self-employed entrepreneurs. The government estimates that around 5.5m SMEs operate in the UK, making up 99.8% of the entire business population.

SMEs play a vital role in the economy by driving innovation, competition and job creation. When their profitability or continued viability is affected by contractual disputes and trade disagreements, which frequently result in late payments, there are knock-on effects for other SMEs and consumers.

How big a problem is late payment for SMEs?

The government estimates that late or non-payment of invoices costs the UK economy more than £11bn each year and causes 38 UK business closures every day. In 2025, most SMEs reported an increase in late payments over the previous six months.

In addition, research by the Federation of Small Businesses (FSB) shows that more than 70% of SME commercial disputes relate to late or non-payment of invoices. Small businesses and self-employed people lose time and money chasing unpaid invoices when they could otherwise be growing their business.

What do SMEs currently do about late payments?

Government and FSB research shows that SMEs only seek professional advice for commercial disputes around 25% of the time, largely because they perceive the civil justice system to be expensive, complicated and slow.

Most SMEs choose to initially chase creditors themselves, hoping for swift payment. But the longer non-payment drags on, the more time is taken away from engaging in their own business activities. If the value of unpaid invoices begins to affect cashflow, it may force businesses to rely on overdraft facilities or other forms of credit, such as loans. In some extreme cases, business owners may feel they have no choice but to use their own funds to keep trading while disputes continue.

What solutions are already in place?

The Office of the Small Business Commissioner provides free support to help SMEs get paid quickly and on time, but this only applies where a small business with fewer than 50 employees has a dispute with a larger business with more than 50 employees.

In late 2024, the Small Business Commissioner launched the Fair Payment Code to improve payment culture among UK businesses. This is a voluntary accreditation scheme that allows businesses of any size to apply for an award tier of either Gold, Silver or Bronze, depending on the percentage of invoices they pay within 30 to 60 days. However, until further data is published, it’s too early to say whether this scheme has improved payment performance.

What other solutions is the government proposing?

The government’s 2025 ‘Backing your Business’ plan for SMEs outlines further steps to address late payments. These include improving public sector payment and introducing new legislation limiting maximum payment terms to 60 days. The government also proposes giving the Small Business Commissioner greater powers to launch investigations, arbitrate disputes and take enforcement action through penalties.

In February 2026, the Business and Trade Committee recommended that the government accelerate its late payments legislation and introduce stronger, enforceable measures to prevent persistent late payment, including mandatory transparency to change behaviour across supply chains. It also suggested making the Fair Payments Code the minimum expectation for all firms with more than 250 employees and mandating 30-day payment terms by the end of this parliament.

What does this mean for your business?

If implemented, these changes could significantly help SMEs dealing with legal disputes and late payments. However, some businesses may resist increased regulation and the costs associated with compliance.

While these proposals continue to be developed, you can take practical steps now to reduce the impact of late payments on your business:

• Know who you’re doing business with – don’t agree to provide goods or services to a business with a bad credit and payment record
• Make sure your contract is in writing and, if necessary, seek legal advice to ensure your terms and conditions suit your business needs and include interest and compensation for late payments
• Don’t allow late or non-payment to escalate. Put a clear credit control plan in place and contact customers as soon as invoices fall due
• If your own credit control processes are unsuccessful, consider stopping further business with the customer and obtaining legal assistance to help recover what you’re owed.

Our commercial disputes solicitors can advise on the legal options available to you if your business is dealing with late payments.