EU Late Payment Directive failing to help businesses

13/06/2016

Just one in five European businesses have reported a positive effect from the EU Late Payment Directive, which was implemented in all EU member states in 2013 in an attempt to solve the widespread issue of late payments and long payment terms, according to a comprehensive study.

The Intrum Justitia European Payment Report of 2016, which surveyed 9,440 companies from 29 European countries to gain insights into the payment behaviour and financial health of European businesses, also found that only 28% of European firms are even aware of the Directive’s existence.

Whilst several economic indicators are pointing towards a brighter future in Europe, late payments still pose a serious threat to businesses’ ability to invest in growth, according to the report, with 33% regarding late payments as a threat to their overall survival.

A further 25% say that they are likely to dismiss staff following the fact that their clients pay late or not at all, with late payment causing trouble for businesses all over Europe, not just the UK.

What is the EU Late Payment Directive?

Imposed into British law in March 2013, the EU Late Payments Directive states that credit terms in B2B transactions shouldn’t exceed 60 days – unless agreed otherwise and if it is not “grossly unfair to the creditor”.

It also says that, in the absence of contractual provisions, the standard credit terms should be 30 calendar days from receipt of the invoice. Thirty days is also the standard term in B2public authorities transactions, although this can be extended to 60 days when justified by the nature or features of the contract.

The Directive also reaffirms the statutory right for businesses to charge late payment interest at 8% plus base rate, in addition to the minimum compensation costs, as stipulated in the UK’s Late Payment of Commercial Debts (Interest) Act.

Intentional poor payment practices

And, it appears the Directive has little impact as many businesses continue to demand longer payment terms.

A shocking 43% of European SMEs questioned said that they have been asked to accept longer payment terms than they are comfortable with, compared to 37% of British businesses.

Almost two-thirds (63% in Europe and 60% in the UK) of the businesses surveyed claimed that “intentional late payments” are among the main causes behind the delayed payments, suggesting that this problem could in large part be solved by new attitudes and guidelines.

Mikael Ericsson, CEO & President Intrum Justitia, said: “That large corporations use their much smaller sub-suppliers to act financier of their own cash-management processes is not only wrong, it also creates an imbalance in society.

“To put pressure on smaller companies to accept longer payment terms while creating instability, insecurity and fewer job opportunities cannot be in any business leaders’ long-term interest.

“On the contrary, there is a link between corporate responsibility for shorter payment terms and a reduction in their long-term risk.

“I am convinced that questions about fair payment terms should be lifted high up on management’s agenda and become an integrated as part of the company’s overall sustainability efforts. A healthy economy creates stability and lowers costs for everyone, large or small.”

Limited precautions

Worryingly, despite the international scale of the problem, almost half of the British businesses surveyed aren’t doing enough to protect their business against bad payment.

Of those questioned, 44% said that they do not undertake any of the following precautions against bad payment: bank guarantees, credit insurance, credit checks, pre-payment, debt collection or factoring.

This is substantially higher than the corresponding European figure of 25%, which shows that UK companies are less protected than their European counterparts.

The lower degree of precautions against late payment could be connected to the perceived risks. Whilst 15% of European businesses think that the risks from their companies’ debtors will increase in the coming year, only 8% of UK companies think the same.

What do you think about the EU Late Payment Directive? Has it helped your business in any way? Let us know your thoughts in the comments below.