The proposed regulation on combating late payment in commercial transactions comes as part of a suite of policies designed to underpin the resilience of SMEs at a time when the cost-of-living crisis and high interest rates have damaged economies across the EU and the world.
Paolo Gentiloni, European commissioner for economy, said the EU had moved to support SMEs across all sectors. “Our ambitious revisions of the late payment rules will create a fairer business environment for SMEs across the entire Single Market.”
The EU first legislated on late payments in 2011 when a payment term of 30 days was set in business-to-business transactions while allowing terms to be extended to 60 days or more “if not grossly unfair to the creditor”. In practice, the commission says, this has led to a payments culture where large clients can set payment terms of 120 days or more for smaller creditors.
Under the new directive a single maximum payment term will be introduced for all “commercial transactions, including B2B and transactions between public authorities and businesses”.
Alongside the 30-day limit, interest will automatically accrue on unpaid bills as well as compensation fees.
... restricting payment terms to address late payment issues is the wrong answer to a real problem
The move, though still only at the drafting stage and yet to be made law, has been met with a mixed response. BusinessEurope, the continent’s largest association for SMEs, said it welcomed EU efforts to create a smoother regulatory regime for SMEs but said it had reservations.
Markus J Beyrer, BusinessEurope’s director general, said: “A culture of prompt payment is key and shorter payment terms in B2B transactions could help increase SMEs’ cash flow. Nevertheless, this should only be considered if the ‘freedom of contract’ is maintained. This is crucial in allowing the flexibility to capture business-to-business specific circumstances.”
The Commission argues in a statement that freedom of contract is maintained “since parties can negotiate any payment term as long as it does not exceed 30 days”.
However, there have been other concerns. Some argue the proposed new rules could have ‘unintended consequences’ while others worry it will undermine the competitiveness of European companies against other elsewhere in other jurisdictions.
EuroCommerce, an organisation that represents the retail and wholesale sector across 27 countries and five million companies in Europe, said it was “very concerned” about the proposal. “We support a culture of prompt payment in Europe, but restricting payment terms to address late payment issues is the wrong answer to a real problem. Agreeing payment terms with suppliers is a crucial element of commercial negotiations. Taking away the chance for buyers who operate with low margins to make sales over a period of time to meet their costs risks distress rather than relief,” said Christel Delberghe, Director General at EuroCommerce.
The organisation added that by imposing a strict term of 30 days, the proposed regulation will deprive businesses of the flexibility to enter into mutually beneficial arrangements. It also argued that the proposal “will cut off supply chain financing, taking away a positive form of finance that fills the gap for companies who struggle to find affordable traditional bank finance”.
“This proposal will have a significant impact on the competitiveness of one of Europe’s essential ecosystems and its contribution to local jobs and communities,” EuroCommerce said. “It will limit retailers’ and wholesalers’ ability to offer choice and good prices to consumers. One in four of all EU SMEs are active in retail and wholesale and for many, this proposal may threaten their viability. It also risks jeopardising the support given to the millions of value chain partners that are SMEs.”
However, research by Intrum, a credit services company, found in a 2020 survey that 71% of debtors pay after the ‘set’ due date, while 65% set long payment terms. More than half of the SMEs surveyed, 52%, say they would hire more staff if payments were faster.
Gavin Hinks is a freelance business and financial journalist