Industry and Entrepreneurship
Late Payments
Giving SMEs tools to combat late payments
Every day across Europe, dozens of small and medium sized enterprises (SMEs) go bankrupt as their invoices are not paid. These companies fail not because of what they owe, but because of what is owed to them. It is a paradox which has become the norm for too many businesses in Europe. Over half of businesses claim to have problems with cash flow due to late payments. The problem is also widening. Between 2011 and 2012, the number of entrepreneurs experiencing this situation has grown by 10%.
Tackling the culture of late payments has become one of the European Commission’s priorities. In a period in which unemployment rates reach two digits in many EU countries, it is imperative to address the roots of the problem. And late payments clearly contribute, as they trigger bankruptcies. In 2012, insolvencies led to the loss of 450,000 jobs in the EU and outstanding annual debts of €23.6 billion.
"Every year thousands of SMEs go bankrupt waiting for their invoices to be paid. We are committed to ending the damaging culture of late payments in Europe, which has long been an issue of concern in the business world. It is clearly urgent for Member States to implement the Late Payments Directive into their national law as early as possible. This will provide crucial support for our SMEs in the current economic crisis, where access to credit has become difficult. It is also vital that European businesses, in particular SMEs, know their rights and how best to make use of them."
To counter this plague, the European Commission proposed a new directive which was adopted on February 2011. The new directive reinforces the protection of enterprises from late payments. Where necessary, it simplifies and makes procedures more consistent and is applicable in all EU countries, as from 16 March 2013. This means that even if a given EU country has not transposed the directive into national law by this deadline, companies are entitled to demand the application of the new European rules. It is a new and powerful tool for entrepreneurs to claim credit legitimately owed to them.
The directive is binding on public authorities, which must pay for the goods and services that they procure within 30 days or, in very exceptional circumstances, within 60 days. If payment periods are not respected the debtor must pay interest rate at least 8 percentage points above the European Central Bank’s reference rate. Public authorities are not allowed to fix a lower interest rate for late payment. Public bodies will also be obliged to reimburse the creditor for the additional costs incurred in recovering the late payment.
Creditors facing late payment are automatically entitled to claim interest for late payment and are also able to obtain a minimum fixed amount of €40 as a compensation for recovery costs. They can claim compensation for all remaining reasonable recovery costs.
Private enterprises should pay their invoices within 60 days, unless they expressly agree other terms, and if it is not grossly unfair to the creditor. This is expected to create a virtuous circle and gradually encourage a culture of timely payments in all economic activities.
In order to make businesses more aware of their newly acquired rights, the European Commission launched an information campaign which is currently running in all EU countries since October 2012 and will finish at the end of 2014.