11/06/09 | Better regulation

Combating delays in payments

Delays in payments have long been an issue of concern for small and medium-sized enterprises (SMEs), especially since disruption to cash flow can mean the difference between solvency and bankruptcy. For this reason, the issue of late payments is a significant focus of the Small Business Act.

With the current economic crisis, the challenge of late payment is becoming ever greater, both because delays in payment are growing, and because the other sources of finance which SMEs traditionally use to tide themselves over, such as credit lines and bank loans, are drying up.

The Commission estimates that nearly €1.9 trillion is paid late within the EU. Of that, a full €1.1 trillion is owed to SMEs. Considering that the EU's combined GDP is around €11.3 trillion, this reflects the sheer scale of the problem. It should be noted that this estimate overstates the size of the problem in that it includes all delays, even those of just a day.

Back in 2000, the EU passed the Late Payments Directive to protect businesses against the spectre of delayed payments. However, the intervening years have highlighted certain shortcomings in the current legislation. To address these, the European Commission proposed, in April, to recast the Directive in order to strengthen the existing rules relating to late payments between businesses, and between businesses and public authorities.

Business representatives welcomed the draft legislation. Eurochambres, the association of European chambers of commerce, described it as "an important step in concretely helping European businesses" which at the present time, are "strangled by payment delays, on the one hand, and the difficulty of accessing credit from banks, on the other".

Public action drive

The proposal has a particular focus on public authorities whose track record has often been far from exemplary. "Late payment by public administrations should no longer be tolerated," said European Commission Vice-President and Commissioner for Enterprise and Industry Günter Verheugen, noting that the proposed modifications would provide "an important impetus to overcome the economic crisis by helping to avoid further bankruptcies and promoting businesses' cashflow".

Under the new proposal, public authorities will have to pay their bills within 30 days or pay "dissuasive" financial compensation. Businesses will not only be entitled to claim interest for late payment but also to obtain reimbursement of their recovery costs. Moreover, for the sake of clarity and to simplify procedures, the proposal fixes the amounts. The Directive, as it stands, excludes claims for interest of less than €5. This will now be abolished, and suppliers can charge even the smallest amount of interest.

The proposal also provides businesses with more recourse to challenge grossly unfair contractual clauses, such as an agreement that expressly excludes interest for late payment. Another important issue the proposal addresses is lack of awareness. Many SMEs are not familiar with their legal rights when faced with payment delays. Under the proposed modifications, Member States will be obliged to provide companies with sufficient information about their rights.

Setting an example

The new Directive grants additional rights to enterprises; it does not oblige them to take action. Companies which wish to exercise their rights to secure payment, along with interest to reflect the delay, will find it easier to do so. However, the decision to take action involves a difficult balancing act, and some firms will choose to tolerate delays in order to preserve good relations with established or important customers.

However, the rules on prompt payment will be obligatory for public authorities, who should lead by example. For its part, the EuropeanCommission is committed to practising what it preaches. Although it already pays most of its suppliers within 30 days, payment periods will be further shortened through the streamlining of procedures.

The text only of the articles can be republished as long as the source of the article is quoted: Enterprise & Industry magazine (http://ec.europa.eu/enterprise/magazine/index_en.htm), © European Union, 2008 - 2012