Should the UK introduce statutory payment terms?

19/05/2020

In the current climate, more businesses than usual are being impacted by late payments and many are wondering what more can be done to prevent these problems.

One proposal that keeps getting mentioned is the introduction of statutory payment terms, something that has already been introduced in other European countries such as France.  

However, there are no guarantees that this solution would really alleviate late payment pressures for UK SMEs, with many counter arguments focusing on what we have learnt from countries with the terms already in place.

Before we go into the counter arguments in more detail, we wanted to look at what statutory payment terms are and how they could be implemented to reduce late payments.

What are statutory payment terms?

Regular credit terms specify how long a customer has to pay an invoice after requesting goods or services from a supplier. They are typically agreed between the two parties before the sale, and can be anything from 7 or 30 days up to 180 days, and sometimes longer.

The EU Late Payment 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 reaffirms that, in the event of late payment, businesses are able to charge statutory interest and compensation in line with the Late Payment of Commercial Debts Act, which was introduced in the UK in 1998.

However, despite these measures aiming to support small businesses, it seems a lot of small businesses are still being forced to offer longer payment terms by larger customers, and are often unwilling to demand interest due to the fear that it will damage the client relationship and cost them repeat business.

The introduction of legally enforceable statutory payment terms would restrict the payment term negotiations between suppliers and clients to be within a set length, even if both parties would have been willing to negotiate longer terms.

The aim of this measure would be preventing payment terms being so long as to put unnecessary strain on the small suppliers.

An example would be that the client has to pay within 60 days of receiving the invoice by default, which are the limitations that have been introduced by several countries such as Austria, Spain and France.

Germany has gone even further, imposing a 30 day maximum, with the law implying that while longer payment terms can be negotiated, they are likely to be considered unreasonable in the case of a dispute.

A legally enforceable maximum payment term also prevents small suppliers from being forced to compete with bigger suppliers that can offer longer terms comfortably, as no matter what supplier the client uses they will be held to the same restrictions.

What are the potential issues?

In principle, mandatory payment terms seem like they would provide some much needed security for small businesses, but there are several issues that could arise and lead to more complex problems.

It can lead to more disputes

Studies in France have suggested that the introduction of mandatory payment terms has actually led to more disputes, which mean the 60-day limit no longer applies. In some sectors in particular, disputes are sometimes used to delay payments, and this could become a bigger problem when clients have to comply with payment terms that don’t suit them.

The end result for the supplier is not only the stress of an unnecessary dispute process, but the payment is actually received far later than it might have been otherwise.

Customers begin buying from overseas

There may also be an effect on the economy if mandatory payment terms are introduced, as large clients may find it more cost effective to begin importing certain supplies or looking to overseas companies to provide services on longer credit terms.

Lose credit term negotiations as a sales tool

Small businesses may also find it more difficult to win new business, as negotiating favourable payment terms is a commonly used sales tool.

For some businesses, this may mean they lose their competitive edge, or they may have to find a new incentive that could cause more damage for their business.

Many companies end up exempt from the regulations

Another issue that has cropped up in countries that have already implemented these measures is that the list of companies considered exempt from the restrictions has grown longer and longer over time, limiting the effectiveness of the solution.

Do you think statutory payment terms should be introduced in the UK? We’d love to hear your thoughts in the comments below.