Two fifths of SMEs can’t pay staff on time due to late payments

Late payments are increasingly undermining the stability of UK small and medium-sized enterprises (SMEs), with new research from Bibby Financial Services (BFS) revealing that two fifths (42%) of SMEs have been prevented from paying staff salaries on time over the past year because customers failed to settle invoices promptly.

The findings, based on a survey of 1,000 SME owners and decision makers, highlight the growing strain late payment practices are placing on cashflow, employment and business resilience. Nearly a quarter (24%) of SMEs said they have paused hiring in the last 12 months as a direct result of payment delays, while four in ten (41%) reported dipping into emergency funds simply to stay afloat.

BFS’s latest SME Confidence Tracker shows the problem is intensifying. SMEs are now owed an average of £66,770 in unpaid invoices – a 10% increase year-on-year – while 62% of businesses say customers are taking longer to pay in full compared with a year ago. The figures point to a worsening late payment culture at a time when many small businesses are already grappling with high operating costs and fragile demand.

“With economic growth already faltering, late payments are a significant threat to the survival of SMEs across the country, applying pressure to businesses already battling high operating costs. When firms are forced to make impossible choices – between hiring and surviving, dipping into emergency funds or struggling to pay staff on time – it’s a clear sign the Government needs to step in,” he said.

The findings echo calls from the Business and Trade Committee, which in its most recent small business strategy report urged the Government to take stronger action to end the late payment crisis. Ahead of the Chancellor’s Spring Statement, SMEs are increasingly vocal in demanding intervention. More than two thirds (69%) believe there should be serious consequences for businesses that repeatedly pay late, while over a quarter (27%) want the Government to introduce specific legislation to protect smaller firms.

The real-world impact of late payments is being felt across supply chains. Tim Gelardi, Director of Systems & Compliance at FORT Builders’ Merchant, said delayed payments are forcing businesses to change how they operate. “We are seeing more customers struggling to pay in line with terms, often because they’re facing late payments themselves or failing to secure the margins they expected when bidding for work. Operational and raw material costs are also unpredictable. If prices spike, there’s no guarantee that our customers have factored that into their budgets,” he said.

“There are several knock-on effects. Late payments force us to waste time chasing customers and require us to implement more official collection procedures which can damage relationships. The situation has meant that we’ve shortened our timescales on customer terms, curtailing supplies earlier – just to get our name in the hat when customers decide who to pay first. At the end of the day, we’re a builders’ merchant, not a bank.”

Ryan added that late payments are eroding confidence and holding back growth across the SME community. “While the Government laid the groundwork for change to the payments framework in last year’s consultation, SMEs are desperate for action, and many are turning to alternative finance for the support they need. If the Government is serious about kickstarting the economy, it must back SMEs with policies that provide certainty that enables businesses to invest in their people, products and services,” he said.