Research and analysis

Late payments research: understanding variations in payment performance and practices across business sectors and sizes (HTML executive summary)

Published 19 September 2024

This is the executive summary of late payments research on performance and practices. Read the full report on understanding variations in payment performance and practices across business sectors and sizes in PDF format.

Introduction

The Department for Business and Trade (DBT) commissioned IFF Research to conduct research to better understand what drives sectoral differences in payment practices and performance.

A total of 300 telephone interviews were conducted using computer assisted telephone interviewing (CATI) between 3 and 31 January 2024. Interviews were conducted with micro to large businesses in the following sector groups:^{[footnote 1]}

• goods
• construction
• pharmaceutical
• insurance
• services

The core objectives of the research were to understand:

• what the main drivers of long payment terms and late payment are, and how this varies across businesses in different industries
• how payment practices vary between businesses in different sectors, and of different sizes
• how standard payment terms are decided
• how suppliers approach negotiating payment terms on specific contracts
• what measures customers take in the same circumstances, and how larger businesses manage their supply chains in general
• what payment methods businesses use
• how businesses could improve their payment behaviours
• what support could be usefully offered by government to support this

Summary findings

What the main drivers of long payment terms and late payment are, and how this varies across businesses in different industries

Payments businesses receive from their business customers

Businesses’ cash flow plays a significant role in late and long payment times. Surveyed businesses most commonly cited cash flow issues outside of their business customers’ control, when thinking about the drivers of late payment. These included their business customers themselves being paid late (40%) or worsening economic conditions (29%). This highlights that late payment can have trickle-down effects through supply chains, where late payment higher up the chain leads to more late payment elsewhere; and that late payments can signal financial distress among businesses as cash flow becomes strained in tighter economic conditions.

Administrative errors are prevalent. 24% of surveyed businesses attributed late payments they received from their business customers to administrative errors, including failing to log invoices or other invoicing errors. Large businesses were more likely to report administrative errors driving late payments (36%), which could reflect more complicated or stringent payment processes across larger businesses, for example ‘no purchase order, no pay’ policies.

Some businesses pay late on purpose. 18% of surveyed businesses suggested that late payments are driven by their business customers purposefully paying late, treating it as a form of ‘free finance’. This was more common for businesses in the goods sector (30%) and micro businesses (24%), and suggests that these businesses could be more likely to experience (or at least perceive) poor payment behaviour across their business customers’ late payments.

There were no definitive and observable variations by size or sector. While the sample of surveyed businesses showed some differences across survey responses, there were no definitive trends. This could suggest either an absence of meaningful differences across sectors’ views, or limitations in the survey design, particularly sample size.

Payments businesses make to their suppliers

Businesses most often attributed paying late themselves to issues with their payment processes or technology, and disputes. 36% of surveyed businesses attributed paying their suppliers late to administrative errors; 31% to disputed invoices; and 23% to technical issues, including invoices getting lost or failing to deliver. Unsurprisingly, surveyed businesses did not cite poor payment behaviour, like paying late on purpose (1%), when talking about their own payment practices.

Micro businesses reported being more susceptible to cash flow issues. 32% of surveyed micro businesses said they paid their suppliers late owing to their business customers paying late, compared to 20% overall; and 12% of micro businesses said worsening economic conditions was a driver, compared to 5% overall. This could suggest financial vulnerability across micro businesses more generally, with cash flows often highly dependent on timely payments from their business customers.

How payment practices vary between businesses in different sectors, and of different sizes

Payments businesses receive from their business customers

30-day payment terms were most common. Micro businesses often offered shorter payment terms, while those in the goods sector often offered longer terms. 54% of respondents with business customers offered payment terms of 30 days after the invoice date, as standard. 11% expected payment within 7 days of the invoice date, rising to 22% for micro businesses. Though still representing a small proportion, businesses in the goods sector were more likely to offer contractual payment terms of 60 days after the invoice date (13% compared to 7% overall).

Businesses most commonly said their business customers paid 30 days after the invoice date, but the same differences by size and sector emerged. Businesses said their business customers most commonly made payments 30 days after the invoice date (31%), followed by payment within 7 days of the invoice date (13%). Micro businesses were significantly more likely to report business customers paying within 7 days of the invoice date (29% compared to 13% overall). Payments 60 days after the invoice date were relatively uncommon (reported by 8% of those with business customers), though were more common in the goods sector (17%).

Businesses that accepted credit and debit card payments from their business customers were less likely to say they received payments 60 days after the invoice date (both 5% versus 8% among businesses overall). Meanwhile, businesses that accepted cash were more likely to receive payment 10 days after the invoice date (3% versus 1% among businesses overall).

Businesses mostly received payments within contractual terms, but small businesses often had issues with late payments. When comparing the typical payment terms offered by businesses to the average time their customers take to pay their invoices, 52% said that their customers paid in line with contractual terms, 36% said their customers took longer to pay, and 12% said their customers paid more quickly. Small businesses were more likely to say it took business customers longer to make payment than the typical agreed terms (49% compared to 36%). There were no significant differences by sector.

The proportion of payments businesses received late was generally quite low, with no conclusive differences by size or sector. When asked for the proportion of invoices paid late, 52% of those with business customers said that, on average, less than 10% of payments were not received within the agreed timeframe. The mean percentage of payments that were late was 17%: ranging from an average of 11% in the insurance sector, 16% in the services sector, 18% in the construction sector, 19% in the pharmaceutical sector, to 21% in the goods sector.

Large businesses and goods sector businesses were more likely to formally pursue late payments. Micro businesses and insurance sector businesses were less likely. 68% of businesses said that they tend to informally pursue late payments,^{[footnote 2]} with a further 27% saying that they would pursue late payments formally.^{[footnote 3]} Compared to businesses overall, micro businesses were less likely to pursue late payments formally (19%) while large businesses were more likely to do so (42%), suggesting a power imbalance across business relationships. Insurance companies were considerably more likely to pursue late payments through informal routes (82%), while those in the goods sector were more likely to pursue them formally (38%).

The main reason for not formally pursuing late payments was to protect customer relationships. The most common reason provided by businesses for not formally pursuing late payments was they did not want to damage customer relationships (33%), rising to 44% among micro businesses. One micro business in the pharmaceutical sector explained that formally pursuing late payments could prevent them receiving more work through their customers. A further 29% of businesses that did not formally pursue late payments said the lateness of payments was not significant enough to justify such measures.

Payments businesses make to their suppliers

Micro businesses were more likely to have to pay their suppliers more quickly, while those in the construction sector were afforded more time. Businesses reported that the most common contractual payment time offered by their suppliers was 30 days (71%). Micro businesses were more likely to be required to pay within 7 days of the invoice date (10% versus 4% among businesses overall). Businesses in the construction sector were more likely to be required to pay within 60 days (14% versus 6% among businesses overall).

Micro businesses and those in the services sector were most likely to pay their suppliers within 7 days. Irrespective of payment terms, 49% of surveyed businesses said they paid their suppliers 30 days after the invoice date, and 11% reported paying within 7 days of the invoice date. Micro businesses were more likely to pay within 7 days of the invoice date (23%), while medium and large businesses were less likely (4% and 0% respectively). Businesses in the services sector were also more likely than businesses overall to pay within 7 days (17% versus 11% overall), as were those who primarily paid their suppliers via debit card (25%).

Most businesses met their suppliers’ contractual payment times, but there were better and worse performers in terms of size and sector.

Where businesses stated the contractual time typically offered by suppliers and the typical time they take to pay, most met the contractual payment terms (72%). 10% took longer to pay than the typical contractual payment time, while 18% paid early.

Micro businesses and those in the services sector were more likely to report paying early (both 27%), while small businesses were more likely to report taking longer to pay than the contractual time offered (19%). This could be in part due to small businesses being more likely to report their business customers taking longer to pay than the agreed contractual payment time, creating a knock-on effect.

Businesses in the services sector were more likely than those in the goods sector to report paying early (27% versus 9%). Meanwhile, businesses in the pharmaceutical sector were more likely than those in the insurance sector to take longer to pay than the contractual time offered (12% versus 0%).

Most supplier invoices were paid on time, but late payments were more pronounced among medium-sized businesses and those in the goods sector.

Most businesses (81%) said that, on average, less than 10% of supplier invoices are not paid within the agreed timeframe, with the mean average of supplier invoices paid late being 7%. The mean average proportion of supplier invoices paid late was higher in the goods sector than the services sector (10% versus 5%). It was also higher in the pharmaceutical sector than the insurance sector (7% versus 4%).

Micro businesses were more likely to report that less than 10% of supplier invoices are paid late (94%), while medium and large businesses were less likely to report that less than 10% of supplier invoices are paid late (73% and 63% respectively). Medium-sized businesses were more likely to say that 75% or more supplier invoices are paid late, as were those in the goods sector (both 4%).

How standard payment terms are decided

The industry standard was the main consideration for businesses when deciding their standard payment terms. 41% of businesses said that the industry standard was a factor when deciding their standard payment terms that they offer to business customers. This was more common among businesses in the services sector than those in the goods sector (52% versus 32%). 22% mentioned that cash flow management was a consideration when deciding the standard terms of payment. The follow-up qualitative interviews provided evidence of this, with some saying it was no use to offer anything other than the industry standard, and others wished to ensure that their terms were competitive.

Micro businesses were more likely to consider customer requirements when deciding their standard payment terms. While relatively few businesses overall mentioned that the customer’s requirements were a factor (7%), this rose to 12% among micro businesses. This implies micro businesses were more receptive to their customers’ needs, providing greater flexibility in their payment terms.

How suppliers approach negotiating payment terms on specific contracts

Most businesses adapted the standard payment terms offered in particular circumstances. 70% of those with business customers said that they do adapt the payment terms that they offer to their business customers, compared to 27% who said that they did not. Medium-sized businesses were more likely to say that they adapt their standard payment terms (83%), however, there were no significant differences by sector.

Some businesses would adapt their payment terms to gain competitive advantage. Many businesses in the qualitative interviews mentioned that they adapted their payment terms in certain situations. In one case, a business recalled offering more lenient payment terms when arranging a relatively large and lucrative contract. This suggests that businesses can use their payment terms to try to gain a competitive advantage.

The size of customer had an impact on how businesses negotiated their payment terms.

Findings from the qualitative interviews indicated that the size of business customers could influence how contractual payment terms were decided. When dealing with smaller business customers, the relationship with the customer and their reputation in the industry were major factors when adapting payment terms.

When dealing with larger business customers, it was clear from the qualitative interviews that some felt that the power around the setting of contractual payment times was very much out of their hands. There were a few examples, particularly from the pharmaceutical sector, where businesses felt that large customers used their size and influence in the industry to demand long and unfavourable payment terms of smaller suppliers.

What measures customers take to negotiate payment terms on specific contracts, and how larger businesses manage their supply chains in general

Most businesses are given a contractual payment time of 30 days to pay their suppliers, often led by the industry standard. Most businesses that took part in the qualitative interviews explained that they are typically given the contractual payment time of 30 days to pay their suppliers, with some explaining that this is the industry standard.

In some cases, the size of the supplier would impact the payment terms. Some said the payment time can vary by size of the supplier, with smaller suppliers requiring immediate payment or payment 7 days after the invoice date.

Established relationships with suppliers would often lead to greater flexibility. Some businesses explained that suppliers who they have a longstanding relationship with would typically allow some flexibility and would not immediately chase them after the payment date.

Large businesses said they did their best to pay their suppliers on time. The few large businesses that took part in the qualitative interviews said they do their best to adhere to the contractual payment time offered to them by their suppliers. One large business explained that they try to be aligned through the supply chain by striving to have a consistent approach regardless of the nature of the supplier. They felt that standardisation resulted in efficiencies rather than having varying terms. However, they said they offer flexibility in particular circumstances, to help the supply chain when they can

What payment methods businesses use

The most common payment method businesses accepted from their business customers was bank transfer.

90% accepted bank transfer, 67% accepted cheques and 50% accepted debit or credit card payments. 29% accepted cash and 14% accepted payments through digital platforms such as PayPal.

Insurance companies were significantly more likely than businesses overall to accept nearly all of these payment methods, with 98% accepting bank transfers, 84% accepting cheques, 72% and 74% accepting debit and credit card payments respectively, and 50% accepting cash payments. Additionally, 20% of insurance companies accepted payments on premium finance^{[footnote 4]} (representing all except one business of the 4% of businesses in the survey that accepted this payment method). Micro businesses were less likely to accept credit or debit card payments (41% and 42% respectively), with the qualitative interviews suggesting high fees were an issue.

Businesses were most likely to use bank transfer for paying their suppliers. For 97% of businesses surveyed, their primary payment method for paying suppliers was bank transfer. 34% paid via credit card and 23% paid via debit card. Compared to businesses overall, micro businesses were less likely to pay via bank transfer (91%), but more likely to pay via debit card payments (38%) and cash (7%). Medium-sized businesses were more likely to pay via credit card (44%), while businesses in the services sector were more likely to pay via debit card (32%).

How businesses could improve their payment behaviours and what support could be usefully offered by government to support this

Government has previously legislated to address late payments. Most recently, the Reporting on Payment Practices and Performance Regulations 2017 (the reporting regulations) were introduced in April 2017 and require large business to report publicly on their payment policies, practices and performance. The reporting regulations were extended and expanded in April 2024 by DBT following a consultation period and the findings of the department’s Payment and Cash Flow Review.

Most businesses were unaware of the reporting regulations, and the level of understanding varied. Only 31% of all businesses surveyed said they were aware of the reporting regulations. As expected given the eligibility criteria, this rose to 42% for large businesses, but remains quite low – less than half businesses potentially in scope of the reporting regulations. More positively, the majority of businesses who were aware of the reporting regulations had a good understanding of their purpose (71%) and the types of organisations the reporting regulations apply to (62%) but only 35% of businesses reported understanding all aspects they were prompted with.

Some businesses did not feel government intervention to improve payment practices was necessary. When asked what the government could do to help improve payment practices and performance in their sector, some businesses said that they did not think this was a significant issue in their industry and so did not support the idea of any government intervention.

Some believed the introduction of maximum payment terms would be beneficial. Where businesses thought the government should act to help improve payment practices and performance in their sector, a common suggestion was the introduction of maximum payment terms. The length of these terms varied. For example, one businesses suggested a maximum payment term of 2 weeks while another said that 90-day payment terms should be banned.

Conclusion

The research findings add to the existing evidence base around late and long payment times. Although the research does not support definitive conclusions around what drives differences in payment practices and performance across sectors, it confirms existing understanding and uncovers new and helpful insights. Further research, with larger sample sizes, could help better identify and understand sectoral differences.

Strengthening the existing evidence base

The department’s Payment and Cash Flow Review discusses wilful and non-wilful late payment, and different factors that can influence businesses’ behaviour – culture, incentives, technology and economic conditions. The research confirms that businesses’ decisions around late and long payment times are complex, but shows that cash flow plays a significant role, with businesses often paying late after experiencing late payments from their own customers. Importantly, this suggests that tackling late payments at the ‘top’ of supply chains has the most significant impact, circumventing other late payments elsewhere.

The department’s Payment and Cash Flow Review also outlines different actions to improve UK payment culture, including working with sector associations and industry bodies. The research finds that existing industry standards are the single biggest driver in how businesses set their payments terms and highlights that ‘bottom-up’ changes (where businesses act unilaterally) could be limited – some level of ‘top-down’ coordination is needed to effect an overall change.

Small businesses have long been the focus of government action to tackle late and long payment times – the reporting regulations look to benefit smaller businesses by increasing transparency around large businesses’ payment times, and the Small Business Commissioner’s Prompt Payment Code requires signatories to make special provisions for payments to small businesses. The research suggests that micro and small businesses are more likely to deal with bad payment behaviour from their business customers, often have limited bargaining power when agreeing payments, and typically cannot take formal action against late payment without risking important customer relationships. All of this points to continued action which prioritises smaller businesses.

New insights

The reporting regulations require large businesses to report on their payment times and contractual terms, and are predominantly aimed at increasing transparency and stimulating competition – specifically, publicly available data incentivises large businesses to improve their payment terms to stay competitive. The research finds evidence of businesses competing on payment terms, however, suggests that this competition is sometimes in the ‘wrong direction’, and can therefore overall increase payment times.

In particular, businesses in the qualitative interviews reported offering longer payment terms when negotiating with their business customers to help win sizeable or important contracts. This shows that within current prompt payment legislation, economic incentives can pull performance in either direction – both better and worse, with smaller businesses likely losing out.

Ahead of publishing the Payment and Cash Flow Review and extending and expanding the reporting regulations, the department consulted the public, inviting views and taking feedback. The consultation received 137 responses from individuals and organisations, which were overall in favour of the proposed renewal.

Although this suggests good understanding and approval among businesses and organisations familiar with the reporting regulations, the research finds overall low levels of awareness across surveyed businesses – even among businesses potentially in scope of the reporting regulations. Importantly, the department is already committed to improving awareness of the reporting regulations as part of the Payment and Cash Flow Review actions relating to increasing transparency, and more active and efficient delivery and enforcement.

1. See appendix in the full PDF version of this report for the sector breakdown included in each sector group. ↩

2. For example, by sending follow-up invoices. ↩

3. For example, charging interest or debt recovery costs on outstanding payments. ↩

4. Premium financing is the lending of funds to a person or company to cover the cost of an insurance premium. ↩