How the Fair Payment Code encourages businesses to pay suppliers on time

No small business likes late payments. Apart from creating a hole in your cash flow, it’s a headache to chase slow-paying customers until the money comes through.

The Government’s new Fair Payment Code aims to end the UK’s culture of late payments. This will help small and medium-sized enterprises (SMEs) free up cash to meet costs, reduce borrowing, and invest for growth.

Complying with this voluntary code could help your business improve its reputation and trust with your suppliers, and become more efficient by reducing collections effort.

However, you may need to make some changes to ensure your business complies with the new standards.

This article dives into the Fair Payment Code and what it could mean for your business. It gathers reactions from SMEs and business bodies, and offers advice on how to encourage timely collections, and improve your own payment practices.

Here’s what we cover:

What is the Fair Payment Code?

The Fair Payment Code, launched on 3 December 2024, sets higher expectations on payment practices than the Prompt Payment Code, which it replaces.

It encourages UK businesses to pay their invoices within certain time limits.

There are three award categories: Gold, Silver and Bronze.

If you pay at least 95% of your invoices within:

• 30 days, you’ll receive the code’s Gold Award
• 60 days and 30 days to businesses with under 50 employees, you’ll qualify for its Silver Award
• 60 days, you’ll achieve the Bronze Award

You can sign up to the new code and apply for one of the awards on the Small Business Commissioner website.

Note: Any business granted a Fair Payment Code award has to be clear, fair, and collaborative with its suppliers. You also have to reapply every two years to remain in the scheme.

In addition to the Fair Payment Code, the government will boost transparency by increasing reporting duties on large companies to include their total sum of payments, and the percentage not paid within agreed terms.

Plus, it plans to expand the Small Business Commissioner’s powers around investigating offenders, for example.

Why address late payments?

The scourge of late payments is worsening.

Companies reporting average payment times over 80 days has increased 20% since August 2023, according to Research by Good Business Pays.

Waiting for late payments means you may have to:

• Use cash reserves to pay your business costs
• Spend valuable time calling customers to ask whether they have received your invoices, and approved and entered them for the next pay run.

Late payments can even lead to thousands of SMEs going bust every year, according to the Federation of Small Businesses (FSB).

Addressing these problems by improving payments culture could keep these businesses going and boost the UK economy by £2.5 billion, said the Government.

Reactions to the Fair Payment Code

Critics say the Bronze Award’s 60-day criteria is much longer than the standard 30 days most businesses expect. But if a company has a Silver or Gold Award, that should be a sign of better payment practices.

Catherine Heinen, technical content writer at TaxAssist Accountants, says: “The Fair Payment Code incentivises companies to pay suppliers on time, [helping their suppliers] access funding and investment, and make long-term decisions, such as committing to large outlays to enable growth.

“SMEs may do more business with large companies if they can rely on those with an Fair Payment Code award.”

Tina McKenzie, policy chair at the FSB, says: “The FPC is an important element of [the Government’s] late payments package that should transform payment practices.

“It’s for UK corporates that deserve recognition for doing the right thing. The code is a huge improvement on the Prompt Payment Code, and sets a clear benchmark for responsible payment practices in its gold tier.

“Setting a 30-day target simplifies the issue. However, many pay faster, and we celebrate them too.”

Edwin Barnes, founder of audiovisual company Moorhen Media, says: “I don’t think we have a single client who would qualify for the Gold Award, so this could encourage more prompt payment.

“However, [late payments] are often down to long-standing operational issues and I’m not sure this provides the impetus to solve them. There needs to be a ‘name-and-shame’ approach, much like gender pay gap reporting.

“If SMEs can rely on prompt payment, they are empowered to work with more new clients, take on bigger jobs, and invest more in the tools they need to grow and offer a higher-quality service.”

Edwin also encouraged other SMEs to sign up to the code to avoid cash flow problems snagging up supply chains.

Work by Good Business Pays suggests a name-and-shame approach can be effective.

Since it named 110 serial late-paying companies in August 2023, 19 of those have improved their payment culture and no longer appear on the list.

How to fine-tune your payment processes

Applying for a Fair Payment Code award can improve the reputation of your business, and you can use the award and logo on your websites and emails to attract new customers, says Catherine.

To access a higher award, you may need to tighten your payment practices, including employee training and controls.

The two-year cycle means you’ll need to keep your team and processes up to scratch to keep meeting the award criteria.

You’ll also need to secure your own cash flow to ensure you can meet the criteria for paying 95% of suppliers on time, adds Catherine.

Ensuring you are clear, fair and collaborative with suppliers may require some fine-tuning of your payment processes.

For example, Edwin says providing clarity includes:

• Giving consistent instructions for sending invoices
• Confirming receipt
• Communicating contact details for chasing late payments.

“Too often, we have to chase our main client contact, who is then burdened with finding who to pass us to,” says Edwin.

“This wastes time and can sour relations with clients, particularly when we have to chase repeatedly.

“In contrast, our best client for payments recently started confirming receipt of every invoice, and communicating when it has been entered for payment.

“We haven’t had to chase an invoice from them since.”

To meet Fair Payment Code criteria, write your own payment terms to align with your targeted award, ensuring they are clear and consistent.

The FSB also recommends communicating openly about your payment practices with clients and suppliers, which can help build relations.

Integrated payment solutions and accounting software can also significantly improve your payment time to suppliers.

Encouraging more timely payments

In addition to doing business with Fair Payment Code signatories, there are many ways to encourage faster payments.

These range from checking your existing or potential customers’ payment times at Good Business Pays, and avoiding serial late payers, to employing psychological techniques when chasing invoices.

A roundtable event run by the ICAEW, a professional body for chartered accountants, said SMEs are often too eager to win business and don’t negotiate or check contract terms carefully. It recommended companies work on improving their payment negotiations, and set clear terms around deposits and timeframes, before accepting contracts.

Edwin says: “One way we increase on-time payments from clients is keeping an up-to-date list on how each client expects to receive invoices, and where to send them.

“We try to ensure the client confirms receipt quickly, and make sure the PO number is in the invoice and the email, making it as easy to find later.”

Technology such as e-invoicing can also help you get paid faster by streamlining your processes, and eliminating the delays and errors sometimes associated with paper or PDF documents.

58% of ICAEW Business Confidence Monitor respondents use e-invoicing and half say it has improved payment times.

Final thoughts

There is likely more to come from the Government’s late payments package, so watch this space.

But many believe the Fair Payment Code is an encouraging start.

“For those at the receiving end of poor payment practices, the FPC provides a framework to demand better,” says Tina at the FSB.

“We need to change the culture in which it is acceptable to pay small businesses late. We hope this is a turning point.”

In the meantime, signing up to the code could boost your company’s reputation significantly.

And taking proactive steps to encourage faster payments from customers can make a big difference to your cash flow and growth potential.