The UK’s late payment reform leaves a hidden leverage loophole

The writer is a reader in supply chain management at Bayes Business School, City St George’s, University of London

The UK’s new 60-day payment rule aims to protect small suppliers from chronic delays. But it leaves a critical loophole: companies can still extend their own cash outflows for months while appearing financially stronger than they are.

Using widely adopted tools — from reverse factoring to structured payables programmes and newer intermediated “pay later” solutions — buyers can push out their payment obligations significantly.

A finance provider may pay the supplier within 10 or 30 days, but the buyer may not settle with that provider for 90, 120 or even 180 days. The global reverse factoring market alone now exceeds half a trillion dollars annually, with double-digit growth projected.

Companies often argue that extended payment terms reflect supply chain needs. In reality, once a business has sold the goods it purchased, the core transaction is complete. Any further delay in payment serves little operational purpose. It becomes borrowing — just not labelled as debt.

For investors, this creates a distorted picture. Extended payment terms affect key measures such as debt/equity, interest coverage and operating cash flow. A company that delays supplier payments can report stronger leverage ratios simply because the financing is not classified as debt. Interest coverage may appear healthier because financing costs are embedded in the cost of goods sold rather than recognised as interest expense. Operating cash flow — a widely used gauge of earnings quality — can be inflated by what is in effect borrowed cash. Nothing in the business has improved, only the accounting optics.

For lenders, the implications are equally significant. Loan covenants are typically written against reported debt, not short-term liabilities. When what is in effect borrowing remains within trade payables, a company can stay compliant while increasing leverage beyond what lenders intended. Economic risk rises, but the formal metrics do not move. This is not a failure of covenant design; it is a classification problem that obscures the true nature of the liability.

The same issue distorts working capital analysis. Declining working capital is often interpreted as evidence of operational discipline. But it can just as easily reflect extended payment terms rather than genuine efficiency. A company may appear lean simply because it delays paying suppliers. The improvement is financial, not operational. Although recent accounting reforms require disclosure of supplier finance arrangements, these details are typically buried in footnotes and easily overlooked by investors, lenders and automated analytics. As a result, financing obtained through extended payment terms often escapes scrutiny.

The solution is to anchor classification in operational reality. If a retailer turns its inventory every 40 days but pays its suppliers via a finance scheme at 120 days, that 80-day gap is not trade credit, it is borrowing. Regulators should adopt a simple benchmark: any payment extension exceeding a company’s physical inventory cycle plus a standard 30-day grace period should be automatically reclassified as debt.

Until extended payment terms are treated for what they are — borrowing — the UK’s 60-day rule risks addressing the symptom rather than the cause. The result is a system in which leverage continues to grow, just out of sight.