Seeking to improve payment behaviour, proposed Late Payment rules risk harming companies, say Markus J. Beyrer (BusinessEurope) and Ben Butters (Eurochambres)

A culture of prompt payment is key for the viability of European companies, especially SMEs. Late payment can jeopardise the survival of otherwise efficient businesses. This is why BusinessEurope and Eurochambres fully support actions to curb late payments and misconduct in all commercial transactions. Discussions on this matter must also reflect the fact that levels of late payment differ substantially across member states and the diverse range of European businesses. We believe that such factors are not adequately reflected in the European Commission’s recent proposal of a new regulation to improve payment behaviour in Europe. This proposal could also have unintended, harmful consequences for European companies, with the greatest risk being to SMEs.

Late payment – One size does not fit all

The Commission’s proposal simultaneously limits the payment deadline to 30 days and completely removes the “freedom of contract” for all commercial transactions, including business-to-business and government-to-business. We support such provisions where the debtor is a public authority. The latest independent report (Intrum[1]) confirmed that late payment by public authorities remains a huge problem in several member states. Government and public service organisations typically pay after 69 days, which goes far beyond the 30-day provision of the current directive. Such practices can discourage companies from tendering for public contracts, a key element of a healthy and stable economic framework. On the other end, despite the existence of late payment cases in B2B transactions too, this is not as severe as often described and certainly not as bad as in the case of public authorities. According to the recent Altares study[2], on average, B2B late payment in Europe is around 13 days. The percentage of ‘long’ late payment as defined by the current directive, i.e., above 30 days, is in the range of only 8%.

Unintended Consequences

At the same time, the unintended consequences of the current proposal for enterprises, including SMEs, seem to have been greatly underestimated. Limiting payment deadlines – one of the negotiating parameters on which companies compete – could push the parties to renegotiate prices and quantities, with the risk of adding unnecessary pressure on an already weak supply chain. Another example concerns seasonal items, or large stocks. How could anyone expect that SMEs at the end of a value chain have the resources to pay for full stocks upfront if their items are yet to be sold? As a result, some companies will need to refinance themselves with huge costs at times of high interest rates and significant margin pressure. Moreover, we are concerned about the potential impact on the global competitiveness of EU suppliers or buyers. If B2B conditions become more restrictive in Europe, this will eventually lead to a shift in demand towards non-EU suppliers in countries where legislation allows more flexible payment terms. Deferred payment conditions are, for instance, offered by non-European suppliers of wind turbines.

The way ahead

The impact of the Commission’s proposal is therefore becoming a source of increasing concern for European businesses. Given the lack of clear information on the proposal’s potential efficacy, BusinessEurope and Eurochambres stress the need for a more pragmatic approach which explores more proportionate ways of further improving the culture of prompt payment. This includes enhancing the current enforcement framework, strengthening mediation and alternative dispute resolution, promoting factoring – a type of finance in which a company sells its invoices to a third party to meet liquidity needs – and sharing best practices as a tool to encourage faster payments. Public authorities also have a special responsibility in this regard; they should lead by example and adhere to reasonable payment terms.

Markus J. Beyrer is BusinessEurope Director General and Ben Butters Eurochambres Chief Executive Officer