Only 20% of companies say that they have seen a positive effect from the EU Late Payment Directive, according to The European Payment Report published by Intrum Justitia three weeks ago. The report's findings come from a survey of over 9,000 companies across 29 European countries carried out between February and April this year to gain insights into the payment behaviour and financial health of European businesses.
The survey also showed that 1 in 3 companies believe that late payment threatens the survival of their company, and 1 in 4 said that they could hire more employees if they were paid faster. Furthermore, 63% of respondents believe that late payments are intentional.
To address these issues, the Late Payment Directive was put into effect in March 2013. The EU recognised that every year, thousands of SMEs go bankrupt waiting for their invoices to be paid, and the challenges from late payment have grown disproportionately as access to credit was squeezed following the financial crash. The objective of the legislation was to significantly improve employment, growth and the liquidity of businesses.
The main provisions of the directive are as follows:
- Harmonisation of the period for payment by public authorities to businesses: Public authorities have to pay for goods and services that they procure within 30 days or, in very exceptional circumstances, within 60 days.
- Contractual freedom in business’ commercial transactions: Enterprises have to pay their invoices within 60 days, unless they expressly agree otherwise and provided it is not grossly unfair.
- Businesses are 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.
- The statutory interest rate for late payment should be increased to at least 8 percentage points above the European Central Bank’s reference rate. Public authorities are not allowed to fix an interest rate for late payment below that figure.
- Member States shall ensure that recovery procedures for undisputed claims are available so that an enforceable title can be obtained within 90 calendar days of the lodging of the creditor’s action or application to a court.
3 years on, the European Commission's own impact assessment finds that rather than legislation, national business culture, economic conditions and power imbalances are the driving factors for payment behaviour. Whilst the rise of alternative finance providers such as MarketInvoice has made significant headway in improving access to credit for SMEs in a challenging economic environment, more needs to be done to tackle business culture and power balances.
A set of recommendations to improve the situation were laid out in the assessment and include:
- changing the way that interest on a late payment is charged. At present, it is up to the creditor to decide whether they charge this interest or not, and many don't exercise their right to out of fear of damaging their business relationships. If this was automatically applied, it would remove this fear and provide a further incentive for the debtor to pay on time.
- increasing the compensation fee. Currently this stands at €40 which is disproportionate to the sums owed and the costs borne by the creditor - these include tangible costs such as the effort required in chasing and recovering late payment, as well as intangible costs such as lost business opportunities because of restricted cash flow.
- raising awareness of the impact of late payment. The introduction of the directive was accompanied by an EU-wide awareness campaign but rather than focusing on the rules and legislation, a future campaign should focus on the impact of late payment with the aim of making it a socially unacceptable practice.
- fostering the development and implementation of prompt payment policies in the public and private sectors. These have been shown to be an effective way to shorten payment duration. However, the public sector needs to take the lead - it is prolifically late making it's own payments and it needs to address this first if it is to successfully stop the same practice amongst big businesses.
- providing access to effective remedies. Though the European Small Claims Procedure exists, it is not often used by companies because of the €2,000 cap on the size of the claim. A more efficient system of debt recovery needs to be provided at the national level.
Whether these recommendations are adopted is yet to be seen but it's clear that the legislation alone has not brought about a widespread improvement in payment speed.
The Intrum Justitia's report showed that businesses are on average 5.6 days late with their payments, with public sector bodies even later at 7.2 days. These are in line with data published by MarketInvoice earlier this year that showed that 60% of all invoices funded on the platform in 2015 were paid late, with the average payment being 6 days late. You can download MarketInvoice's full late payment report here: http://info.marketinvoice.com/late-payment-report-af
Late payments, as well as long payment terms, cause trouble for enterprises all over Europe and the consequences can be counted in lost jobs and growth opportunities. More than every third SME (34 %) say they could hire more employees if they were paid faster, according to the survey presented in Intrum Justitia’s annual European Payment Report.