The New Year reckoning: Why does Q1 break so many businesses?

Q1: A time for fresh starts and New Year’s resolutions, but for too many UK businesses, it’s when they become financially stressed, or worse – go under.

The new year squeeze hits hard as post-Christmas trading is reconciled, cashflow tightens, and the VAT quarter looms large. Certain industries including retail and hospitality are also entering their quietest periods. As for those invoices you’ve been chasing since November? They’re still not paid. 

It’s no coincidence that insolvency practitioners see their busiest period during the first couple of months of the year. Last January, company insolvencies rose 11% year-on-year to 1,971, according to Insolvency Service data – the highest levels registered that particular month for over five years. The impact of these insolvencies disrupts supply chains, delays payments, stalls contracts, and impacts sales forecasts – all putting further strain onto businesses. 

Of course, it’s not just January that deserves its bad rep – it’s all of Q1, because early-year issues trickle down to create even bigger problems by March. It’s the perfect storm of financial pressure, and businesses need to remain vigilant during this time.

Q1 is peak season for business failures and when late payment in the UK hits hardest

According to the most recent research by the Office of the Small Business Commissioner, 14,000 businesses close each year because of late payments – that’s 38 businesses every single day. In total, an estimated £112 billion is locked up in late payments according to Sage and CEBR research, on average £42,000 per business. 

These numbers are more than just a number on a spreadsheet as you try to navigate the Q1 cash crunch – it’s payroll you can’t meet, suppliers you can’t pay, and investment that you can’t put into your business.

The first quarter simply amplifies every payment issue. And throughout it all, those late-paying customers continue to sit on your money, blissfully unaware (or perhaps entirely aware) that they’re putting your business at risk.

Businesses facing their own difficulties will prioritise their legal obligations and paying whoever chases hardest, leaving ‘friendly creditors’ last. Often, these issues have built up over time – for example, the same customer names constantly appearing in aged debtor reports. The trouble is that these warning signs rarely announce themselves as ‘commercial dispute’ but manifest in more innocuous forms.

The real cost of late payment in the UK

It’s an uncomfortable truth that late payments don’t just cost you the money you’re owed. They consume time, resources, and potentially your entire business. The same SBC research found that businesses spend an average of 86 hours per year chasing late payments, equating to 133 million hours of staff time.

But the real cost is measured in closed doors and lost livelihoods. Late payments drain the UK economy of billions every year, and the impact can be terminal for individual businesses.

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Your New Year’s action plan

Q1 is the time to be ruthlessly proactive about your cash flow. Here’s what you need to do:

• Review your debtor book Which invoices are overdue, and do any customers stand out with a history of late payment? Which debts represent the biggest risk to your cash position? Don’t wait until the next quarter to ask these questions.
• Chase early and chase hard. That friendly email reminder isn’t cutting it anymore – if you don’t already have a robust credit control process in place, now is the time to adopt one. Be clear about your payment terms and the consequences of non-payment. This doesn’t need to be aggressive, just firm and focused on recovery.
• Don’t waste time repeating your credit control processes beyond 90 days. Not all late payments are equal – the client is either struggling financially, or doesn’t value you enough to pay. At this point you can qualify it as a genuine bad debt, or take formal action by moving to the recovery stage.
• Have a plan for escalation. If you can’t secure payment or agree a payment plan, it’s time to outsource the problem.  The quicker you move, the more likely you are to protect your cash flow.

The longer a dispute remains unaddressed, the harder recovery becomes. Evidence grows stale, memories fade, and counterparties become entrenched in non-payment positions. More critically, businesses in genuine distress may dissipate assets, leaving less to recover even if you eventually prevail. 

Businesses that act decisively within 90 days of a payment issue or raised dispute and deploy a proper credit control and legal recovery process recover substantially more than those who spend 90 days hoping for a resolution, before taking considered action. 

View our ‘Avoid our write-off trap guide’ for further insights. 

The harsh reality is that some debtors will only pay when faced with legal consequences

Friendly reminder emails were never going to work, because they know all too well that many businesses lack the conviction or funds to properly follow through with action. This passive approach fuels the UK’s late payment culture and allows businesses to carry on with their unacceptable payment practices. 

At this point many SMEs hit a wall, because traditional legal action means upfront costs, hourly rates with no guarantee of success, and the very real risk of adverse costs if things don’t go to plan. The prospect of spending thousands on lawyers’ fees with no guarantee of recovery sounds like a risk not worth taking. 

And so valuable cash remains locked up in late payments in the UK, because the system for recovering it is broken. 

Litigation funding changes the game

The cost and risk of legal action has always been prohibitive to SMEs recovering what they’re rightfully owed, but litigation funding removes those barriers and can be used for disputes and debts from as little as £1,000.

What does this mean in practice? No upfront costs. No hourly billing. No financial exposure if the case doesn’t succeed. 

Whether it’s a disputed invoice, a contract breach, or simply a customer who’s decided your cash flow isn’t their problem, this is a gamechanger for businesses staring at a debtor book full of late payments. That £17,000 you’re owed? You can now pursue it without worsening cash flow problems and take the cost of pursuing it off your balance sheet. Or the disputed contract worth £50,000? You can take legal action without gambling your business on the outcome.

At Escalate, we back our judgement and our ability to recover your money, which means we only get paid when you do. Our packaged service combines legal expertise, dispute resolution, litigation funding, and cost protection into a single solution that cuts the time of a typical dispute in half, because we understand that cash is king – and you need your money recovered quickly, not tied up in a lengthy legal process. 

Our team quickly determines whether recovery is possible, or if it’s a genuine bad debt write-off. We’re a combination of lawyers, accountants, sector specialists, funders, and insurers, all aligned and working together under a regulated law firm model into a single SME solution to help fix a broken market. Ours is a unique proposition, and there’s no comparable business model in the marketplace currently.

Don’t let your business become a statistic of the UK’s late payment culture 

Over the coming months, thousands of businesses will close because of late payments. Thousands more will write off debts they could have recovered, simply because they didn’t know there was a commercially viable alternative.

While the Q1 cash flow crunch is real, the key to overcoming it is vigilance, early action, and knowing when to escalate from reminders to recovery.

If your debtor book is keeping you up at night, if you’re staring at late payments that could make or break your quarter, or if you’ve got a business dispute that’s dragging on (even if you’ve already engaged a lawyer), it’s time to have a different conversation.

Get in touch with one of our team to discuss how our unique packaged solution can help you recover what you’re owed – without adding to your financial pressures. No upfront costs. No financial risk. Just a clear path to getting your money back.

If you’d like to get in touch with one of the Escalate team to discuss an unresolved dispute or late payment, please contact us on 0207 039 1950 or email us.