The UK's new late payment laws: what they actually mean if you're trying to get funded

The UK's new late payment laws: what they actually mean if you're trying to get funded

On 24 March 2026, the government published its response to the late payment consultation. The headline is that the UK will get the toughest late payment laws in the G7. The detail is more interesting than the headline.

Here's what's actually changing, why it matters beyond cash flow, and what you should do about it now.

What's been announced

Three things you need to know.

First, there's now a hard cap of 60 days on payment terms when a large company is paying a smaller supplier. The old rule let businesses agree to longer terms as long as they weren't "grossly unfair". That exemption is being removed. 60 days becomes the ceiling, not the target.

Second, mandatory interest on late payments. All commercial contracts will be required to include statutory interest at 8% above the Bank of England base rate. With the base rate currently at 3.75%, that's 11.75% on any overdue amount. This isn't optional and can't be contracted out of.

Third, the Small Business Commissioner is getting real teeth. The role is shifting from advisory to enforcement. The Commissioner will be able to investigate poor payment practices, adjudicate disputes outside of court, and levy fines against persistent late payers. We're talking fines calculated as a percentage of turnover, potentially running into tens of millions for the worst offenders.

There are exemptions. Contracts between two large businesses aren't covered. Neither are cross-border imports and exports. And the changes need primary legislation, so they won't land overnight. But the direction is clear.

Why this matters more than you think

Most of the coverage has focused on the cash flow angle. That's fair. Late payments cost the UK economy an estimated £11 billion a year and contribute to roughly 38 business closures every day. Those are real numbers with real consequences.

But here's what most people aren't talking about: late payments don't just drain your bank account. They damage your ability to get funding.

When a customer pays you late, the money that should be sitting as cash on your balance sheet and in your bank account is trapped in receivables instead. Your debtor days creep up. Your bank balance looks thinner than it should. And when a lender reviews your application, they see exactly that: lower cash levels than they'd expect for a business of your size and revenue.

High debtor days raise questions. A lender looking at your accounts might conclude that your receivables process is weak, or worse, that a customer is unlikely to pay at all. Either way, it undermines your affordability. A business that's profitable on paper can look unaffordable on a bank statement if most of its revenue is sitting in unpaid invoices.

And the pressure compounds. Poor cash flow is the single biggest killer of otherwise viable businesses. When cash is stuck in receivables, you stretch your own payables. You lean on your overdraft. You delay payments to suppliers or existing credit facilities. And that's when your own credit position starts to deteriorate, not because of anything you did wrong, but because someone else didn't pay you on time.

What to do now (don't wait for the legislation)

The reforms need to pass through Parliament. That takes time. But you don't need to wait for the law to change before you act.

Update your payment terms. If your contracts don't currently reference statutory interest on late payments, add it. Under the existing Late Payment of Commercial Debts (Interest) Act 1998, you already have the right to charge 8% above base rate plus a fixed compensation amount. The new laws will strengthen this, but the existing right is already there.

Tighten your cash conversion cycle before you apply for funding. This is the practical bit. If you're planning to apply for a business loan in the next 6 to 12 months, focus on shifting as much of your accounts receivable into actual cash as possible, well ahead of the application. Tighten your collections process. Chase invoices earlier. At the same time, if you can manage a slightly slower payables cycle for a few months without damaging supplier relationships, your bank statements will naturally show higher cash levels and stronger affordability.

Lenders look at bank statements. They look at the pattern of money coming in and going out. Consistent 30-day collection cycles look very different to lumpy 90-day ones. The cleaner your cash flow picture, the easier the approval.

There's an irony here, though. If you're successful enough at tightening the cash conversion cycle, you might find you don't actually need the funding in the first place. Which would be the best possible outcome.

Report persistent late payers. The Small Business Commissioner already handles complaints and can intervene informally. When the new powers arrive, having a record of reported issues will strengthen your position.

The bigger picture

These reforms are a structural shift. For the first time, there's a real financial consequence for large companies that treat their small suppliers as free credit facilities. Whether the enforcement bites as hard as the rhetoric suggests remains to be seen. But the signal is clear: the government is serious about this.

For small businesses looking for funding, the practical takeaway is this. Anything you can do to tighten your payment cycles now will improve your fundability later. Don't wait for the law. Fix what you can control today.