What is the Prompt Payment Code and how has it changed?​

Late payments and delayed fulfilment cost SMEs an average of £22,000 annually, as highlighted in our analysis of credit risk management solution. Furthermore, Federation of Small Businesses (FSB) research suggests this can affect 2.8 million small firms, leading to up to 50,000 business closures a year. Therefore, the UK government has announced a consultation on new laws to hold firms to account, encourage cash flow, and grow the economy.

This consultation will be launched in the coming months.

Prime Minister Keir Starmer said:

“We’re determined to back small businesses by unlocking their barriers to growth, and stamping out late payments is at the heart of this.

“We know how important it is for business owners to have the peace of mind and certainty around their cashflow to keep their businesses alive. Late payments cost businesses tens of thousands of pounds and is one of the biggest reasons businesses collapse.

“After years of delay, we’re bringing forward measures that small businesses have long been calling for to tackle late payments once and for all.”

New legislation will also require large businesses to include payment reporting in their annual reports, and enforcement will be enhanced on existing late payment performance reporting regulations. Non-compliant company directors could face criminal prosecutions, including unlimited fines, if they don’t report their company’s payment practices.

Also announced was a new Fair Payment Code (FPC), which replaced the old Prompt Payment Code (PPC) as of September 2024. Under this new system, businesses must prove they’ve met good payment standards before being awarded an official code status of bronze, silver, or gold.

Small Business Minister Gareth Thomas said: 

‘Small businesses deserve to be paid on time, it’s as simple as that. I’m optimistic that today’s first big step will help pave the way for real change that supports SMEs to thrive and help to grow our economy.

‘New research published by the Department for Business and Trade has found payment problems multiply the further down the supply chain you go. With delays to payments increasing with each business along a supply chain, this results in smaller businesses generally experiencing more issues with late invoices than larger firms.’

The Prompt Payment Code (PPC), administered by the Office of the Small Business Commissioner (OSBC) on behalf of the Department of Business and Trade (DBT), was a voluntary code of practice for businesses. Established at the end of 2008, it set a standard for payment practices between organisations of all sizes.

The Prompt Payment Policy encouraged payments to be made on time, within agreed terms, and provided guidance on dispute resolution around late payments.

The code was strengthened in 2021 with the addition of required elements such as:

• To pay 95% of invoices within 60 days
• Annual payment performance reporting
• The right to charge late payment interest and charges

The PPC was replaced by the new Fair Payment Code in autumn 2024 to address late payments and improve practices for UK businesses. The hope is for increased transparency, accountability and protection for SMEs in future.

Therefore, we agree there’s a need for more prompt payments to ensure healthy cash flow and encourage business growth. However, the success of the changes will depend on enforcement, compliance, and business adoption rates.

As of November 2024, there were around 5,300 signatories. However, we believe that progressive businesses seeking bronze, silver or gold status will typically pay their invoices on time. So, this leaves many questions unanswered, such as:

• How can those most likely to default be encouraged to volunteer to the code?
• What happens if a customer can’t pay?
• And, what about bigger businesses?

The spirit of these changes and trade credit insurance are the same – removing growth barriers and eliminating late payments. So, the government’s announcement is a positive step towards addressing late payments, but this will not solve cash flow issues alone.

Trade credit insurance provides businesses with credit risk insights to make informed business decisions on who to work with and what credit limits to extend. We can also offer proactive risk management alongside the Code by giving intelligence on a buyer’s likelihood of payment default. This enables you to offer credit terms with confidence, knowing that your trade receivables due within 12 months are insured.

It also provides protection should a customer fails to pay, whether it’s due to insolvency, refusal or an inability to pay under the terms of the contract, whereas the new code only works if a company has the funds to pay.

Together, the new Fair Payment Code and trade credit insurance could be a match made in heaven. The code will encourage good and fair behaviour, and insurance can provide protection should customers default.