Half of small businesses in the UK are currently operating in the red, according to the latest Small Business Insights index.
Data from 250,000 SMEs showed that only 49.5 per cent of businesses were operating in positive cash flow last year.
The UK's biggest firms were also found to be paying SMEs late, as on average 30-day invoices were paid after 46 days.
The study put together by Xero said that late payments was putting a serious cash squeeze on smaller businesses.
Vicky Pryce, economist and previous director general for economics at the Department for Business, Innovation and Skills, commented: "The impact of late payments on the economy cannot be exaggerated. Work done by the European Commission looking at both business to business and government to business payments found that late payments were directly associated with worsening firms’ cash flow positions, and particularly for smaller firms."
Small business commissioner Paul Uppal added:
Small businesses are crucial to the health of our economy so it is vital that they feel supported in all areas, but particularly in the fight against late payments.
My role as commissioner exists to help small businesses get paid on time, and while the government works on measures to address the late payment epidemic, businesses should not be afraid to come to us for help. Now is the time to make Britain the best place for entrepreneurs to flourish.