The new Small Business Protections Bill

The new Small Business Protections Bill: a quiet revelation in commercial contracts

For too long, many SMEs have had to contend with late payments sitting in that uncomfortable category of “commercial problems” that businesses just have to put up with.

In fact, suppliers have had a statutory right to interest for some time, compensation has been available and codes of practice have come and gone. Yet the practical reality hasn’t changed, as smaller businesses have continued to act as involuntary lenders providing credit to their larger customers.

The government’s new late payment legislation (the Small Business Protections Bill), introduced to Parliament this month, is a step towards ending this practice.

Whilst its in the very early stages for the bill (which may not be in force for another 12 months), what is striking is not just the content of the reforms, but the philosophy behind them.

From technical rights to enforceable outcomes

The existing framework has always had a fundamental weakness in that enforcement has been optional and therefore largely illusory. In theory, a supplier could charge 8% interest above base rate. In practice, they rarely did as a result of commercial dependency, relationship management and reputational concerns.

The new regime attacks that problem in two ways. First, it removes the ability to contract out of the rules. If the new bill makes it through Parliament unscathed, statutory interest will effectively become mandatory in commercial contracts, rather than a default that can be diluted or ignored.

Second, it introduces real enforcement. The Small Business Commissioner will no longer be a guidance body but will be repositioned as a regulator, with powers to investigate, adjudicate disputes and impose financial penalties on persistent late payers.

The result is legislation that moves away from “you can enforce this if you want to” to “this will be enforced whether you like it or not”.

The New Small Business Protection Bill and the 60-day cap

The headline reform is the proposed 60-day cap on payment terms in large-to-small business contracts. Looked at closely, this is a fairly fundamental rebalancing of negotiating leverage.

For decades, extended payment terms have been a quiet but powerful tool. Large organisations have been able to push risk and working capital pressure down their supply chains. 90 or 120 day terms have not been unusual in certain sectors. The new cap does two things:

• It removes the ability to impose those terms contractually
• It reframes long payment cycles as unacceptable

In effect, the law is intervening directly in a pricing mechanism and by limiting how long payment can be delayed, the legislation is redistributing the cashflow value back towards suppliers.

Closing off the “tactical dispute”

Another underappreciated element of the Small business protections bill, is the proposed time limit for raising invoice disputes. One of the most persistent payment delay tactics has been the late-stage query (comprising a vague concern raised just before a payment falls due, resetting internal processes and extending the payment cycle).

The introduction of a defined window for disputes (after which invoices are deemed accepted) is a targeted attempt to eliminate that behaviour.

From a legal perspective, that is significant. It imports a degree of finality into what has historically been an open-ended commercial interaction.

Governance, not just compliance

Another interesting development sits outside the black letter law. Large companies with poor payment performance will be required to explain themselves at board or audit committee level.

This turns payment behaviour into a governance issue and by extension, an ESG issue. That matters because reputational risk is often more effective than legal risk. Once payment practices are visible, comparable and attributable to decision-makers, they become much harder to ignore.

In that sense, the legislation recognises that culture, not contract wording, is what ultimately drives behaviour.

Stepping back, the reforms collectively target the use of suppliers as a source of free working capital. Late payment has effectively allowed larger businesses to finance themselves at the expense of smaller ones.

The scale of the issue is not trivial and estimates suggest it costs the UK economy around £11 billion annually and contributes to thousands of business failures each year.

Whether the legislation fully achieves that aim remains to be seen. Much will depend on how actively the new powers are used and how far businesses seek to restructure commercial arrangements to work around the rules.

How should businesses start preparing for the The New Small Business Protections Bill?

Even though implementation will take time, the direction of travel is clear.

In practical terms, there are three immediate implications:

• Contract review: Standard terms with extended payment periods or watered-down interest provisions will need revisiting
• Process discipline: Businesses will need tighter internal systems for approving or disputing invoices within defined timeframes
• Board awareness: Payment practices are moving onto board agendas

A cultural reset?

It is tempting to view these reforms as a technical update to a long-standing piece of legislation.

What is happening here is arguably closer to a cultural reset. The law is intervening not just to regulate contractual terms, but to reshape expectations about how businesses treat one another.

For suppliers, that may feel like long overdue protection.

For larger businesses, it is a reminder that payment practices are no longer a purely commercial choice and will become a matter of legal compliance, scrutiny and accountability.

How Morr & Co can help?

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Corporate & Commercial team on 0333 038 9100 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.