Unpaid invoices and the time it takes to chase late payments puts a heavy burden on small businesses - the new Fair Payment Code aims to help.

The new code, which builds on the foundations of the Prompt Payment Code set up in 2008, has come at an important time. With small businesses struggling with unpredictable conditions and costs alongside a lack of consumer confidence to spend – over 25,000 small businesses registered themselves as insolvent in 2023. That’s the highest number in 30 years.

Businesses can find themselves in trouble for a number of reasons. The impact of high inflation seen last year is an obvious factor, alongside business rates, taxes and debt repayments. All of these contributing factors are made considerably more difficult if money isn’t coming back into the business promptly and predictably. 

The cost of unpaid invoices is significant. Smart Data Foundry findings from November 2022 suggest it costs SMEs £22,000 a year on average - with the Small Business Commissioner adding a third of payments to small businesses are made late. The average value for these delayed payments is £6,142.

These numbers are high - and they’re entirely unsustainable. So what is the Fair Payment Code and how can it help you tackle late invoices?

What is the new Fair Payment Code?

While the new code is coming in under the Labour government - it’s officially launched by the Small Business Commissioner - an independent public body set up by Government to tackle late and unfavourable payment practices in the private sector - in partnership with the Department of Business and Trade.

The new code aims to be more ambitious, aspirational and robust than the previous code which it is building upon, by rewarding businesses for paying suppliers quickly and treating them fairly. Here’s how.

The Fair Payment Code will include a set of fair payment principles alongside three award categories. These categories are:

• Gold – For companies paying 95% of their suppliers within 30 days
• Silver – For companies paying 95% of their small business suppliers within 30 days and all other suppliers within 60 days
• Bronze – For companies paying 95% of suppliers within 60 days

It’s hoped, following stakeholder consultation, the new award categories will inspire businesses to work harder when it comes to paying their suppliers - many of whom are small businesses that can’t afford to wait indefinitely for invoices to be settled. 

The new code will also support businesses that are keen to improve payment practices by helping them move up from Bronze to Silver, and to Gold over time, recognising change doesn’t happen overnight. 

When the Fair Payment Code officially launches later this year, it’s said it will come with a two-year limit on awards and a more robust approach to enforcement too.

How can the Fair Payment Code help my small business?

The new code puts a lot of onus on larger businesses - so it’s right to ask what it can do for your small business. And while it’s fair to say the larger a business is, the more detrimental it is when they don’t pay invoices on time - the code is designed to help all SMEs get paid on time. 

Here are four things you can do to get the most out of the Fair Payment Code:

1. Sign up to the code

There are over 5,000 signatories to the current Prompt Payment Code, but feedback during the recent consultation process raised issues with its design, operation and effectiveness. When the new code officially launches later this year, it could be worth signing up to it so your business can benefit from its protections.

Any larger businesses that are also signatories will be encouraged to pay within the timeframes set out in the new code, especially those aiming for gold status which requires 30-day payment cycles to achieve. 

2. Lean on gold, silver and bronze standards 

With the new code, your business will be able to highlight the importance of timely payments - especially when it comes to dealing with larger companies aiming for the high-tier statuses like silver and gold. 

The new code will also shine a light on compliant (and not so compliant) businesses - which you’ll be able to use as leverage in holding your clients to account. A gentle reminder that late payments will impact their reputation means you can negotiate faster payments.

3. Consider e-invoicing solutions

It’s important your business has its own house in order, of course. Knowing how to make an invoice is an important part of the process, and so is having a business bank account and a savings account. But in 2024, digitalisation is paving the way for new efficiencies too. 

While the finer details of the new code are yet to be announced, the direction of travel seems to be around digital transformation with Rachel Reeves, Chancellor of the Exchequer, speaking to this during her speech at the Labour Party conference recently. With the need to improve productivity - HMRC already plans to launch a consultation on electronic invoicing (e-invoicing) to encourage its wider use among UK businesses and government departments.

So it’s possible the payment culture under the new code might encourage businesses to adopt technological solutions like e-invoicing which can reduce delays. Large business management solutions companies like Sage already offer e-invoicing. If momentum builds and the code directs businesses to these modern methods, SMEs can advocate for their use with clients - decreasing payment processing times and potential administrative errors.

4. Know where to go if things aren’t working

Enforcement is a key point made in the announcement of the new code, so it’s important you  work with enforcement bodies like the Small Business Commissioner and the Federation of Small Business (FSB) to ensure larger businesses stick to their payment commitments. The additional transparency of the new code puts more of an emphasis on doing the right thing. 

For now, in the run up to the Fair Payment Code launching later this year, consider taking some of these proactive steps. And when the code launches, you can ensure your business is in the best position to take advantage of its benefits.

Kyle Eaton, money.co.uk business insurance expert.