A late payment crisis affecting smaller firms has worsened during the economic lockdown, according to a new report.

The Federation of Small Businesses (FSB) said its research showed that most small firms have been affected by late payment as a result of Covid-19, seriously stifling cashflow.

Firms dealing with the public sector fare no better than those selling to other businesses, said the report.

The federation called for a “long-awaited” review of the Prompt Payment Code to be launched, repeat offenders fined and prompt payment to be made a precondition of state bailouts.

The debilitating late payment crisis should be brought to an end as the business community looks to emerge from the current recession, said the FSB.

Almost two thirds of small businesses have been subject to late or frozen payments in the wake of the Covid-19 outbreak, according to a survey of more than 4,000 firms.

FSB chairman Mike Cherry said: “Before the Covid-19 outbreak struck, many small firms were already under immense financial pressure because of late payments.

“With cashflow drying up as the lockdown took hold, this situation has worsened. Sadly, some unscrupulous corporations are trying to inoculate themselves from the impacts of Covid-19 by withholding payments, or even freezing them, at the expense of small businesses.

“Our endemic culture of treating small businesses as free credit lines against their will must be brought to an end.

“Worryingly, this behaviour isn’t just confined to the private sector. Late payment is equally prevalent within government supply chains.

“If the small firms that make up 99% of our business community are to play the fundamental role we need them to in ending this recession, this behaviour must stop. The Government promised to act a year ago. Time is running out – we need to see delivery.”

A spokesman for the Department for Business, Energy and Industrial Strategy (BEIS) said: “Late payment can mean the difference between survival and bankruptcy for many small businesses. We expect big companies to stand by their smaller partners and pay them on time.

“We are working to tackle the culture of late payments to protect jobs and livelihoods, including by strengthening the Prompt Payment Code and reviewing the powers of the Small Business Commissioner.”