SME payment terms: are you ready for the UK’s new 45-day rule?

As we reported a while back, payment terms for SMEs are back on the agenda. On 30th July 2025, the government launched a consultation aimed at tackling late payments. It included proposals to cap payment terms at 60 days, with a further reduction to a maximum of 45 days after a five-year transition period, and to give greater enforcement powers to the Small Business Commissioner. While fast payment standards already apply to bidders for large public contracts (who must demonstrate an average payment period of 45 days from October 2025), the extension of this measure to the private sector as a whole remains subject to the adoption of definitive legislation following the consultation.

For many small businesses, this is genuinely encouraging. But tighter rules on SME payment terms don’t automatically equal faster cash in the bank. The businesses that benefit first will be the ones with clear SME payment terms, clean paperwork and disciplined credit control.

This article sets out what’s proposed, what’s already in place, and what SMEs should do now to protect cashflow – especially when dealing with larger customers.

What’s changing and why SME payment terms are under the spotlight

For a long time, late payment has been treated as ‘just how big customers behave’. The latest government plan frames it as a growth barrier for SMEs and proposes tougher, more enforceable standards.

The headline proposal: 60 days reducing to 45 days

The government’s plan is to introduce legislation that would introduce maximum payment terms of 60 days, which would reduce to 45 days after a transition period. This is likely to be over five years.

The details depends on final legislation, but the direction of travel is clear: long payment terms are in the government’s crosshairs.

Stronger powers for the Small Business Commissioner

The government also wants to strengthen the Small Business Commissioner’s ability to intervene. The 2025 consultation proposes giving the SBC powers such as spot checks on companies’ payment reporting, with a wider move toward more meaningful enforcement.

The Financial Times’ reporting on the reforms also describes potential penalties for persistent late payers and enhanced oversight expectations for larger businesses.

Board-level visibility and reporting pressure on large firms

Another feature reported in FT coverage of the reform package is increased scrutiny on large companies’ payment practices, including disclosure and governance oversight.

What the law already allows you to do about late payment

Even before any ‘45-day rule’ becomes law, SMEs already have legal tools to help them handle late payment of their invoices. However, few use them because they are afraid to damage relationships with clients.

Firms can charge statutory interest on late payments for business-to-business transactions. The statutory interest rate currently stands at 8% plus the Bank of England base rate, subject to contract terms. Importantly, the government is looking to make these interest payments compulsory, preventing large firms from insisting SMEs waive them.

‘Better rules’ won’t fix cashflow unless your SME payment terms are solid

While most SMEs would welcome a new 45-day rule, a change in legislation isn’t the same as a collection service. To get paid sooner, it’s essential to have clear controls. If you don’t, you may find yourself struggling with these problems:

• Vague terms. For example, you may ask for ‘payment on completion’ without properly defining what that means.
• Stalling tactics. If a customer waited until late in the payment period to raise a query, knowing you can’t prove when they received the invoice. (However, do note the new proposals include a 30-day invoice verification period, which would mean disputes must be raised with 30 days of receipt. If they aren’t the invoice must be paid in full).
• Missing information. For example, if there’s no Purchase Order (PO) number on your invoice, it may never get approved.

For these reasons, you need to be able to say (and prove)

• What terms apply
• Exactly when the clock starts
• What triggers ‘acceptance’
• What happens if payment is late (i.e. state that interest becomes payable)

Practical preparation: what SMEs should do now

While the proposed changes to SME payment terms are not yet legal requirements, now is a good time to audit your systems and controls.

We suggest you begin with the following:

• Auditing your SME payment terms to make sure that they are consistent across quotes, proposals, engagement letters and invoices. If the payment terms differ in these documents, then disputes can arise.
• Ensuring terms were accepted and you have evidence to prove it.
• Define all necessary conditions such as what ‘on completion’ actually means
• Add an acceptance clause into your SME payment terms, defining who approves invoices, what documentation is needed (PO, timesheets, delivery note etc), and a defined dispute window (to avoid late challenges to the invoice slowing down its payment)
• Upgrade credit control from ‘chasing’ to a timed process – including timings for reminders, escalation and formal requests for interest payments.

Fix invoice hygiene

Late payment is often enabled by small avoidable errors. Fixing these is an easy way to help improve your cashflow. Put systems in place to ensure that you avoid these errors:

• missing PO numbers
• wrong billing entity
• invoice sent to a personal inbox instead of Accounts Payable
• vague line items that trigger queries

Many accounts payable teams treat the payment clock as starting only once they accept an invoice as ‘valid’. If your invoice is missing a PO, the 45 days might not start until you send the corrected version two weeks later.

Summary

SME payment terms are set to become shorter and more enforceable, particularly when large firms are the customers. The best time to prepare for the changes is now, by tightening your systems, paperwork and credit control to make payment simpler and less afflicted by loopholes.

If you’d like some help to review your payment terms, stress test your debtor days or strengthen your cashflow controls, get in touch with your THP account manager today. They’d be delighted to help you.