Toughening Up on Late‑Payment Laws: A Global Shift in SME Protection

Toughening Up on Late‑Payment Laws: A Global Shift in SME Protection

From Treasury Mastermind

Governments around the world are increasingly stepping in to curb long‑standing corporate practices of stretching payment terms—often at the expense of small and medium‑sized suppliers. A recent UK announcement outlines plans for “the toughest late‑payment laws in the G7,” setting maximum B2B payment terms at 60 days (with a phased move to 45), mandating interest on overdue invoices, and giving regulators the power to issue multimillion-pound fines. Audit committees will also be legally required to oversee supplier payment practices at board level.

This follows earlier European Commission proposals to revise the Late Payment Directive, with ideas such as a 30‑day payment cap under consideration. While initial pushback led to further consultation, the direction is clear: long payment terms are under scrutiny, and legislative momentum is building.

Why This Matters for SMEs & Corporates

Bridging the Power Imbalance

Large corporations often negotiate payment terms of 90–120 days or more, leveraging their bargaining power. SMEs, lacking that leverage, are left to absorb the strain. These reforms aim to level the playing field, helping small suppliers maintain liquidity and avoid the knock-on effects of delayed payments.

Working Capital Fallout

For corporates, long payment terms have historically served as a cheap form of working capital. But as regulation shortens these windows, buyers will see earlier cash outflows, putting pressure on internal cash management. On the supplier side, SMEs lose the flexibility of absorbing long waits for payment and may face cash flow issues that limit their ability to grow, invest, or even survive.

Working Capital Solutions: Factoring, Reverse Factoring & More

To deal with the stricter rules, both buyers and suppliers are likely to turn to alternative financing models:

Factoring

SMEs sell their invoices to a third party to receive immediate cash, reducing the cash flow burden of waiting for payment. While helpful, it can be expensive and is dependent on supplier creditworthiness.

Reverse Factoring (Supply Chain Finance)

Buyers use their own stronger credit rating to help their suppliers get paid earlier via a financing partner, while still maintaining longer payment terms from their own books. This can preserve working capital for both parties if structured correctly.

Dynamic Discounting

Suppliers offer discounts for early payment, and buyers can take advantage of savings while improving supplier relationships.

Other traditional options such as overdrafts, credit lines, and invoice discounting also remain on the table, but the focus is shifting toward more digital and embedded finance options.

Fairer, but Not Without Trade‑Off

While it’s clearly fairer for SMEs, this regulatory shift introduces new challenges for corporates:

  • Liquidity strain from earlier cash outflows
  • Board-level accountability, requiring CFOs and treasurers to revisit internal processes
  • Greater need for cash forecasting and working capital modeling
  • Potential pricing pressure, as suppliers may adjust prices to reflect shorter terms

Still, the broader benefit is a healthier and more predictable supply chain, with less disruption caused by late payments and bankruptcies.

What Should Treasurers Do?

  1. Map exposure: identify where your company relies on long payment terms and model the cash flow impact of reducing them.
  2. Review supplier finance programs: assess the viability of reverse factoring or early payment options to support key suppliers.
  3. Upgrade forecasting tools: more frequent, more accurate working capital forecasts will become critical.
  4. Engage procurement and finance: ensure there’s alignment across departments to navigate regulatory change.

In Summary

Governments are putting late payments under the microscope—and rightly so. The goal is to create a more equitable environment for SMEs and reduce systemic financial risk. But for corporate treasurers, this means a shift in how working capital is managed.

Stricter rules may cut into traditional levers like stretching payables, but the right combination of internal forecasting, financing tools, and supplier collaboration can soften the blow—and may even lead to more resilient supply chains.

If you’re concerned about how upcoming rules could affect your cash position or payment policies, now is the time to act. Better to get ahead of regulation than scramble to catch up later.

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