The government’s new 60-day payment cap sounds like a win for small businesses. But the evidence from France and Chile tells a very different story — and the consequences could be catastrophic.
This week, the government announced what it called “the toughest crackdown on late payments in over 25 years.” A 60-day cap on payment terms. Mandatory statutory interest at 8% above base rate. Multi-million-pound fines for persistent offenders. Sweeping new powers for the Small Business Commissioner.
The press releases write themselves. The Federation of Small Businesses is delighted. Ministers are congratulating each other. Small business owners are supposed to feel saved.
They shouldn’t.
The Headline Problem
Let’s start with what everyone agrees on: late payments are a genuine problem. Around 38 businesses a day close because they’re not paid on time. The economic cost runs to £11 billion a year. Large companies using small suppliers as interest-free credit lines is indefensible.
No argument there.
But diagnosing a problem correctly and prescribing the right treatment are two very different things. And the government has just reached for the legislative sledgehammer when the situation calls for a scalpel.
What Actually Happens When You Cap Payment Terms
The government assumes that if you force large companies to pay within 60 days, they will simply… pay within 60 days. Problem solved. Small businesses thrive. Growth unlocked.
This is fantasy.
Here’s what the research actually shows.
When France introduced its Loi de Modernisation de l’Économie — capping payment terms at 60 days — London Business School researchers tracked exactly what happened. Large retailers didn’t cheerfully comply and carry on. They adjusted their behaviour in ways the French government never intended.
Hardware retailers saw a 16% decline in trade credit, which led to an 11% reduction in inventory. That translated into a 15% drop in revenue and a 3% decline in gross profit. Not for the large companies — for the retailers who were supposed to be helped.
The mechanism is straightforward: when you restrict the terms a buyer can offer, you remove flexibility from the supply chain. Trade credit isn’t just a payment delay — it’s a financing tool that allows suppliers and buyers to share inventory costs and risks. Remove that flexibility by government decree, and both sides suffer.
It got worse in Chile. When the government restricted payment terms that one large retailer could impose on smaller suppliers, the retailer’s response was blunt: it significantly reduced trade volumes with small suppliers and shifted sourcing to its own subsidiaries. The small businesses didn’t get paid faster. They stopped getting orders at all.
The UK Version of This Problem
Now transpose that to the UK. You run a small manufacturing business. Your biggest customer is a large corporate with £200 million in revenue. Currently they pay you on 90-day terms. It’s not ideal, but it’s predictable — you factor it into your cash flow, maybe use invoice finance to bridge the gap. The relationship works.
The government has just told your customer that 90-day terms are illegal. They must pay you within 60 days, with mandatory interest penalties if they don’t. If they persist, the Small Business Commissioner can launch investigations and levy fines worth tens of millions.
What does your customer do?
Option A: Pay you 30 days faster and absorb the working capital impact.
Option B: Find a larger supplier who doesn’t trigger the “smaller supplier” threshold — or bring the function in-house — and stop using you altogether.
If you’re a CFO at a large company, Option B starts looking very rational. Why take on the regulatory risk, the compliance burden, the potential fines, when you can simplify your supply chain and avoid the problem entirely?
And that’s the catastrophe nobody in government is talking about. The small businesses most dependent on large corporate customers — the ones this legislation is supposed to protect — are the ones most at risk of losing those customers entirely.
The Free Market Already Has Solutions
Here’s what frustrates me about this intervention: the market was already developing better answers.
Supply chain finance — where a bank or fintech platform pays the supplier early and collects from the buyer at the original terms — gives small businesses fast payment without disrupting the commercial relationship. It’s voluntary, flexible, and growing rapidly.
Invoice factoring lets small businesses unlock cash from outstanding invoices immediately. The cost is transparent and the supplier chooses whether to use it.
Dynamic discounting lets buyers offer early payment in exchange for a small discount — both parties benefit, neither is coerced.
These solutions work precisely because they respect the commercial relationship between buyer and supplier. They don’t require a politician to second-guess what payment terms two consenting businesses should agree on.
The government’s approach does the opposite. It assumes that Whitehall knows better than the actual parties to a commercial contract what the right terms should be. It’s the same paternalism that has given us decades of well-meaning regulation that makes business harder, not easier.
Who Really Benefits?
Follow the incentives. The Small Business Commissioner gets a bigger budget, wider powers, and the ability to levy multi-million-pound fines. The FSB gets a policy win it can publicise. Ministers get a press release. Lawyers and compliance consultants get a new revenue stream.
Who pays? The large companies absorbing the working capital impact — which they’ll recover through lower prices to suppliers or reduced order volumes. And the small businesses who lose contracts because the compliance burden of engaging them has just gone up.
The government’s own research acknowledges that 15% of businesses already avoid doing business with specific customers based on payment behaviour. Now imagine what happens when the penalty for late payment includes mandatory 12.5% interest and potential investigation by a commissioner with fining powers. The rational response isn’t to pay faster — it’s to reduce exposure to the risk entirely.
What Should Have Happened Instead
If the government genuinely wanted to help small businesses get paid faster, it could have:
Incentivised early payment through tax breaks for companies that consistently pay within 30 days. Reward good behaviour instead of punishing everyone.
Invested in supply chain finance infrastructure to make early-payment platforms more accessible to smaller firms. Many SMEs don’t even know these tools exist.
Named and shamed — which was already working. The existing payment practices reporting regime was gradually improving corporate behaviour. Give it time.
Strengthened contract enforcement through faster, cheaper dispute resolution — not a new bureaucracy with fining powers, but better access to existing courts and arbitration.
Instead, we got a sledgehammer. Maximum terms dictated by statute. Mandatory interest rates set by government. A new enforcement body with investigative and fining powers. The full apparatus of state intervention in what should be a private commercial matter.
The Uncomfortable Truth
The uncomfortable truth is that payment terms are a function of market power, and market power reflects economic reality. A small supplier accepting 90-day terms from a large customer is making a commercial decision — trading payment speed for volume, for a prestigious client name, for a reliable revenue stream.
That trade-off might not be ideal. But it’s their trade-off to make. When the government removes that flexibility, it doesn’t eliminate the power imbalance — it just forces it to express itself in other ways. Lower prices. Smaller orders. Or no orders at all.
The businesses that close because of late payments are a visible, sympathetic problem. The businesses that will quietly lose contracts because large companies de-risk their supply chains — those closures won’t make the press release. But they’ll be just as real, and potentially far more numerous.
Government should keep its fingers off commercial contracts. The free market — messy, imperfect, sometimes unfair — remains a better determinant of trade terms than any minister with a mandate and a deadline.
Need help navigating the new payment regulations and their impact on your business? Whether you’re restructuring supplier terms or reviewing working capital strategy — get in touch.