ECJ EUROPEAN Cleaning Journal

Legislators are having another crack at reining in businesses that delay paying supplier invoices. The European Commission admits the current late payment directive is “ineffective” … but will the new rules work any better this time round? Hartley Milner asks.

It’s the stuff of cash flow nightmares, it inhibits investment, drives smaller companies to insolvency and has defied all efforts to stamp it out. Late payment remains endemic across west Europe and has an especially debilitating impact on small and midsize businesses (SMBs) that account for more than half of the region’s gross domestic product.

Commission figures show:

• More than 60 per cent of businesses are not paid promptly

• One in four bankruptcies are down to invoices not being paid on time

• Chasing late payments costs EU businesses €275 billion a year – more than the total GDP of Finland – and there is a domino effect with each overdue payment causing four others

• 20 per cent of businesses view payment delays as a barrier to their green transition

• 900,000 jobs could be created in the public sector if payments were on time.

Harder to quantify is the toll on SMB owners of not knowing when an invoice debt will be honoured, if at all, and the cash flow anxieties the uncertainty causes. Many employers tell surveys they have sacrificed their own salary in a bid to keep their company solvent, remortgaged or sold their home, or cut back on making family spending commitments. Mental health impacts reported include sleepless nights, mood swings, loss of self-esteem, depression and, in extreme situations, suicidal thoughts.

High inflation, geopolitical tensions and rising borrowing costs have created a tough year for businesses in Europe over the past 12 months. Amid decreasing profits and financial stress, many companies delayed or halted their investment plans, focusing instead on cushioning liquidity impacts, a poll by trade credit insurance provider Atradius shows. The result was a significant deterioration in B2B customer payment behaviour and a larger volume of unpaid invoices.

Currently in the EU, public authorities must pay invoices within 30 days. Businesses have up to 60 days to settle their debts, or later if they can agree terms with suppliers. However, Atradius finds that the volume of late B2B payments increased by an average of 20 per cent over the past year, with payment delays affecting 49 per cent of all sales. Suppliers had to wait an average of 73 days to collect payment. The level of bad debts written off as uncollectable was maintained at an average of six per cent of all invoiced B2B sales.

Afraid of damaging relations

Suppliers can claim interest and compensation on overdue payments, but rarely do so for fear of provoking the ire of the client, particularly if they are crucial to a healthy bottom line. “Indeed, they are too afraid of damaging their trade relations,” says employer group SMEunited. “In addition, they are often the weaker partner in a contract.”

The core change in the new payment proposals drawn up by the European Commission sees the directive elevated to a regulation. The 30-day period for B2B payments will become the absolute maximum, “eliminating ambiguities and closing legal gaps” in the current directive. Critically, the changes ensure automatic payment of accrued interest and compensation if payments run into arrears, and blocks larger companies from ‘bullying’ smaller ones into accepting their payment terms. The Commission prescribes a “robust enforcement framework” to ensure compliance with
the measures.

A welcome knock-on benefit for business managers is the time they spend chasing debtors will be significantly reduced, collectively saving them 340 million hours a year, equal to €8.74 billion for the entire EU economy. The Commission is also keen for SMBs to use digital tools to help them get paid faster.

The regulation will harmonise payment regimes across the EU in key areas such as payment verification procedures, the rate of interest charged on overdue payments and the amount of flat fee compensation, the Commission says. For their part, member states will be required to set up prompt payment enforcement authorities with the flexibility to bring in more stringent actions of their own.

Public sector bodies will be reined in as well where abuses of their 30-day payment deadline exist. “No more exceptions for the public sphere,” said Thierry Breton, commissioner for the internal market. In addition, companies that have public contracts will need to submit proof they have paid their own subcontractors on time. Payment delays can lead to SMBs paying invoices late, pushing the problem down the entire value chain.

More resilient

“It has really been a nightmare to harmonise this,” said Breton, explaining the complexities of reforming the failed directive. “Our ambitious revision of the late payment rules will create a fairer business environment for small businesses across the entire Single Market. This will make SMBs more resilient and help them weather challenging times.”

Business groups have been quick with their responses to the new measures. SMEunited president Petri Salminen said: “The revision of the late payment directive proposing strict payment terms of 30 days should strengthen the investment capacity of SMEs.” However, he stressed that member states should be able to have stricter rules and the possibility for sector-specific agreements.

“With these elements, the proposal will be a good basis to give entrepreneurs ownership of their cash flow and the capacity to invest in their business, amongst others for the twin transition (decarbonisation and digitalisation),” he added.

EuroCommerce, which represents retail and wholesale sectors, was rather less impressed. The group said it was concerned that prohibiting companies from agreeing payment terms beyond 30 days would “severely affect established practices” that rely on negotiating payment terms.

“We support a culture of prompt payment in Europe, but restricting payment terms to address late payment issues is the wrong answer to a real problem,” said director general Christel Delberghe. “Agreeing payment terms with suppliers is a crucial element of commercial negotiations. Taking away the chance for buyers who operate with low margins to make sales over a period of time to meet their costs risks distress rather than relief.”

Delberghe said the 30-day rule would deprive businesses of the flexibility to enter into mutually beneficial arrangements. It would also cut off supply chain financing, taking away a positive form of funding that fills the gap for companies who struggle to find affordable traditional bank finance.

“This proposal will have a significant impact on the competitiveness of one of Europe’s essential ecosystems and its contribution to local jobs and communities,” she asserted.

BusinessEurope has similar concerns. Its director general, Markus J. Beyrer, acknowledged that a culture of prompt payment was a must and shorter payment terms in B2B transactions could help increase SMBs’ cash flow. But he stressed: “This should only be considered if the freedom of contract is maintained. This is crucial in allowing the flexibility to capture business-to-business
specific circumstances.”

The European Commission’s proposals, announced as part of a wider SMB relief package, will need the approval of the European Parliament and EU Council before passing into law.

Some of west Europe’s most unpunctual payers are to be found in the UK. One in four invoices received by large businesses is paid late and there has been no improvement in the average time it takes to pay suppliers, according to the Chartered Institute of Procurement & Supply (CIPS). CIPS says findings from its analysis of government data highlight an “entrenched culture of late payment within the business community”.

Entrenched culture

Since 1 July 2021, large companies have been required to pay 95 per cent of invoices from small businesses – those with less than 50 employees– within 30 days, halving the previous payment window. The exception to this is where a small business has agreed an alternative timeline with its client. The maximum payment period for transactions between larger companies remains at 60 days.

The government clampdown appeared to have an impact, with the number of late payments falling from 31 per cent to 26 per cent. However, they have remained at that level into 2023. This means large businesses are regularly missing their own contractual deadlines for paying their smaller suppliers, CIPS discerns. Large companies have taken an average of 36 days to make payment, a figure that has barely moved over the past five years, in fact falling by just one day since 2018.

Large UK businesses have to twice yearly submit data on their domestic payments to the government’s prompt payment database. Despite this requirement, the number of submissions has fallen every year since 2019, with 15,087 submissions in 2019 but only 12,829 in 2022.

The UK government is due to report on its own review of payment rules before the end of this year. One measure being considered is for businesses to report the total value of their late payments, as well as the number of payments. This would reveal the financial impact of poor payment on the UK economy and address concerns that the data is being distorted by businesses paying small invoices quickly while delaying larger ones.