Tackling late payments: How the new Fair Payment Code will support SMEs

Late payments are a constant obstacle to the success of small businesses everywhere. For many SMEs, the impact extends far beyond waiting a few extra days for payment. Unpaid invoices can lead to cash flow struggles, making it harder to pay suppliers and employees - and in the worst cases, forcing businesses to close. Research conducted by the Federation of Small Businesses (FSB) in 2022 found that 52% of small businesses in the UK suffer from late payments, with the FSB describing it as one of the most prevalent problems faced by small businesses.

Here’s what you need to know about the Fair Payment Code, how it works, and why it could be a game-changer for helping SMEs receive timely payments and maintain healthy cash flow.

What is the Fair Payment Code?

The Fair Payment Code (the Code) is the UK government’s latest tool to incentivise large businesses to pay small businesses on time. It is a voluntary code of practice that rewards big companies for their commitment to fair payment practices. The new Code replaces the previous Prompt Payment Code launched in 2008, introducing a more robust approach to holding businesses accountable for fulfilling their payment obligations on time.

The Code aims to:

• Improve cash flow: Help small businesses maintain operations and meet financial obligations through prompt payments.

• Create accountability: Make payment practices public, encouraging businesses to adhere to prompt payment commitments and boosting their reputation for fair practices.

• Reward good payers: Unlike the old Code, companies that sign up can earn a Gold, Silver, or Bronze award, highlighting their reliability to potential partners.

How does the Fair Payment Code work?

The Code is overseen by the Small Business Commissioner and introduces several key features, such as:

1. Clear payment terms: Large businesses that opt in must adhere to specific payment timelines, ensuring invoices are settled promptly.

2. Public accountability: Payment practices are made public, putting pressure on large businesses to meet their commitments.

3. Award system: The Code rewards businesses for paying suppliers quickly and treating them fairly. Businesses can apply for Gold, Silver, or Bronze status based on their payment behaviour.

How can the new Fair Payment Code benefit small businesses?

If successful (i.e. if large companies often criticised for late payments choose to opt in), the new Fair Payment Code offers several benefits to small businesses. By improving cash flow and ensuring suppliers are paid on time, the Code aims to enhance the financial stability of SMEs. This would minimise financial uncertainty and allow business owners to focus on growth rather than chasing payments.

The introduction of an award system also makes it easier for SMEs to identify companies that prioritise fair payment practices while highlighting those that fall short. This transparency can produce more reliable partnerships, giving small businesses the confidence to operate without concerns about delayed invoices.

Gareth Thomas, The Small Business Minister, commented:

These measures will help remove barriers that are holding our small businesses back and ensure everyone has the backing they need to succeed.

How will the award scheme work?

The award scheme recognises businesses that pay invoices on time by categorising them into the following tiers:

• Gold Award: for businesses that pay at least 95% of all invoices within 30 days.

• Silver Award: for businesses that pay 95% of their small business suppliers within 30 days, and all others within 60 days.

• Bronze Award: for businesses paying at least 95% of all invoices within 60 days.

Awards are valid for two years, after which businesses must reapply. This ensures that larger businesses maintain good payment practices and do not revert to poor behaviours after achieving an award under the Code.

How does the award scheme benefit buyer-side businesses?

The Fair Payment Code not only benefits SME suppliers, but also businesses purchasing their services, as suppliers will be more likely to prioritise partnerships with reliable companies that have a proven track record of timely payment.

For example, if a small supplier has the resources to provide services to only one business but receives requests from two, the supplier is more likely to choose the business that demonstrates its commitment to fair payment practices by holding a Gold, Silver, or Bronze award.

How do you sign up to the new Fair Payment Code?

You can sign up to the Fair Payment Code via the official website. Signing up is simple and positions signees as reliable payers, which could open doors to potential partnerships. Please note that businesses that previously signed up to the Prompt Payment Code will not automatically be enrolled on the new Code, so you must submit a fresh application form.

What should you do next?

A downside to the Code is that it is still voluntary, even for the largest companies in the UK. However, If you’re an SME supplier working with large clients, this is a great time to check whether they’re signed up to the Fair Payment Code. If they’re not, you can encourage them to join - it’s free and demonstrates they are committed to fair payment practices.

If your business already requires clients to adhere to the previous Prompt Payment Code, it’s important to update your internal policies and/or contracts to reflect the new Fair Payment Code, specifying an award level if relevant.

Alternatively, if you're a large business considering signing up for the Fair Payment Code, visit the website. You can also find out more by reading the official press release on the government website.

Final thoughts

At its core, the Code is about creating an economy where small businesses can thrive without the persistant worry of unpaid invoices. It aims to hold large firms to account and encourage an equal playing field amongst SMEs. By signing up and supporting its principles, larger companies are helping to shape a fairer, more sustainable playing field for businesses of all sizes.

To learn more about the Fair Payment Code, visit the official website.

Tags: Fair Payment Code, small businesses, late payments