Cashflow challenges for German businesses

26th of June 2014
Cashflow challenges for German businesses

German reporter Thomas Schulte-Marxloh on the problems caused to small and medium sized businesses by late payment of invoices.

In Germany an invoice has to be paid within 30 days and, luckily, the vast majority of customers are paying on time. Some customers, however, seem to lack either payment behaviour or money. Public authorities seem to be the worst defaulters.

Many businesses are suffering from customers who do not pay for delivered goods or services on time; though only few customers refuse payment completely, many customers pay way too late. They are not just a nuisance for businesses but can be a real threat, in particular for small and medium sized firms.

Ten years ago the president of the Association of Skilled Crafts in Germany (ZDH), at that time Dieter Philipp, complained many insolvencies were caused by defaulting payers. He also criticised, in his view, insufficient laws which protect the defaulter rather than enforce the legal claims of companies.

Since then not too much has improved; despite some optimistic reports about slight improvements regarding payment behaviour from time to time. Not only private customers but also contracting authorities are still persistent in terms of default payment. This April, finally, the government passed a bill which pressurises private, commercial and public customers to pay on time.

As Heiko Maas, federal minister of justice and consumer protection, explains: “With this law the payment behaviour in business shall improve. This strengthens liquidity and competitive capacity; particularly of small and medium sized enterprises.”

Unpaid invoices can hit SMEs severely as they are usually paying in advance for material and/or man-hours when delivering their services.

Holger Schwannecke, present general secretary of the ZDH, believes the government’s draft is a positive signal to fight default of payment and “will effectively prevent bad payment behaviour and disproportionately long terms of payment”.

Apart from new laws, it seems some companies also have to rethink their procedures regarding defaulters. According to the BDIU (federal association of debt-collecting agencies), the main reasons for insolvencies are insufficient reminder mechanisms, lack of equity, management mistakes, followed by bad debt (B2B), delayed payment of customers and bad debt (B2C).

Companies sometimes hesitate sending a reminder to their customers in order to maintain the ‘good business relationship’. Business relations with public authorities or ‘big players’ are most appealing for SMEs; unfortunately their business partners are very aware of their influence and power.

When these good customers demand flexibility regarding terms of payment some companies agree, not considering that their own financial capacity may be over-stretched. The new law is meant to stop disproportionately long terms of payment, preventing customers from enjoying a loan with no interest which the contractor has to pay for.

Time will tell if the new law is able to change the minds of defaulting payers in general and public authorities in particular. It is unlikely the individual civil servant will have to pay in case of a contravention; it will most likely still hit the taxpayer...


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