How to Solve the SMB Financing Problem? A Roadmap to Fixing Late Payments in the UK

With his feet firmly planted under the Cabinet table, one of his first priorities will be to boost growth. That six-letter word will be the driving force behind his achievements at Number 10, and at the heart of his economic success must be the UK’s small businesses and the financial technology sector.

According to the Federation of Small Business, in 2023 SMEs were expected to account for 60% of all employment and over half (53%) of all private sector revenues in the UK. If we are to improve economic growth, small businesses need to grow and flourish, the focus must be on removing the barriers that hold them back.

Payments are one such pain point for SMEs that could require further scrutiny from government and innovation from the fintech ecosystem. Small businesses currently face significant delays between billing customers and the money needed for costs and wages reaching business accounts, with £23.4 billion owed to UK businesses in unpaid invoices. Delayed payments have knock-on effects across the economy, and the volatile trading environment they foster is restricting cash flows between UK businesses.

Technological solution to the problem of late payments

Government alone can’t have all the solutions, and businesses need more resources and tools to manage and mitigate the impact of late payments, something the fintech and payments industries are already working to address. From merging financial services to introducing fintech solutions that were once reserved for consumers, such as BNPL-style credit models, it’s clear that the fintech ecosystem is starting to offer solutions to the problem.

However, the role of the government will be to introduce more stringent regulations. While the outgoing government has introduced various measures, such as the Prompt Payment Code (PPC), these initiatives have not yet had the desired impact. While the PPC was previously a voluntary code of practice that encouraged businesses to pay suppliers on time, there should be commitments to make this mandatory at the first opportunity if it is to be more than a footnote in the sand.

Introducing tougher penalties for late payments and encouraging transparency and accountability in payment practices would improve cash flow for SMEs and help the economy grow. One way to do this could be to give the Office of the Small Business Commissioner greater powers to fine repeat offenders. And this approach may be necessary; the government estimates that paying small businesses on time could boost the economy by £2.5 billion a year.

That’s not to say that addressing late payments is a magic bullet that will spur growth overnight. There are more things the government can and likely will do to encourage SME growth, such as addressing startups’ access to capital. Nevertheless, this dual approach of government regulation and fintech solutions could lead to a healthier startup landscape, with money flowing more freely between companies.

What does this mean for the fintech industry?

Fintech is one of the UK’s most valuable startup sectors, thanks in large part to innovative financial services regulation over the past few years. The introduction of open banking standards has sent positive signals to the market and shows that the UK can effectively balance consumer protection while enabling innovation.

Fintech is playing a leading role in easing the barriers to small business growth. From solving cash flow management and delayed payments, to streamlining accounting and bookkeeping processes, UK fintech startups and scaleups can play a significant role in driving economic growth in the economy, beyond their own success.

By working with regulators, the UK fintech sector can lead the way in building solutions, a trend already evident in the payments space. Regtech is fast becoming one of the most innovative verticals in UK fintech, but fintech startups are also filling the gaps that regulation doesn’t cover. While government policy can provide a stick to punish unfair payment practices, paytech can act as a carrot, making it easier for UK businesses to pay and receive payments. As new payment offerings mature and tools come together, these solutions will only improve and accelerate the flow of money to SMEs, giving the economy a much-needed boost.

On the steps of Downing Street, Starmer said “the work starts today” and while the honeymoon period may not be over, the hard work of boosting economic growth needs to start soon and fintech could be at the heart of it.