Late payments directive
EUF position paper on Late payments directive
The EU Federation for Factoring and Commercial Finance welcomes Commission proposal to fight late payments
Summary
The EU Federation for Factoring and Commercial Finance (EUF) generally welcomes the new proposal to fight late payments as announced by the European Commission on 8 April 2009. The EUF agrees with the Commission’s overall objective of improving the cash flow of European businesses, which is of particular importance in times of economic downturn. The EUF considers the Commission's initiative as an essential step forward that needed to be taken in order to address the challenges that come with the current financial crisis and its effects on the payment discipline of debtors resulting in delayed or late payments. In particular, it helps to prevent small and medium size enterprises (SME’s), being the key players in a vibrant EU economy, from cash-flow shortages that could ultimately result in bankruptcy - all this as a result of debtors paying late.
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The factoring and commercial finance industry can provide essential services to better manage late payments, as highlighted in the European Commission's Impact Assessment. Over several decades, the factoring and commercial finance industry has demonstrated to be an effective way of providing alternative finance options for SMEs, often considered as a higher risk borrowers. Factoring and commercial finance offers companies the possibility of outsourcing credit and risk management; improving performance and quality; and freeing up of key resources for strategic developments. Given the industry's proven track record in good risk management, with a low “loss given default” ratio, factoring and commercial finance is a consistent financial instrument which stimulates the growth and success of companies.
The EUF sees the recast of the Late Payment Directive as a positive first step towards addressing payment issues in the EU. However, the EUF considers that this important piece of legislation for businesses should be more thoroughly considered by relevant European stakeholders.
Why late payments need to be addressed
Late payments constitute a major challenge for businesses, with SMEs being particularly vulnerable. A delay on the payment carries the severe risk of liquidity constraints that affect the competitiveness and viability of the companies. Moreover, it increasingly leads to the economic failure of otherwise viable businesses, causing in some cases a series of bankruptcies across the supply chain of a particular sector. In times of economic crisis, this risk increases now that SMEs will find it more difficult to access financial instruments such as bank loans or short-term credit. These realities have negative consequences for the financial management of the enterprise, causing multiple cash flow issues. Late payments occur in the private as well as public sector.
Another problem resulting from late payments is the large amount of time and expense involved in the collection of overdue debts. In the majority of the cases, cost caused by the extra administrative activities cannot be recovered, and many businesses prefer to avoid the additional administrative costs generated by chasing late payments or charging interest for late payments. Therefore creditors feel they are left with very little incentives to motivate debtors to respect timely payments.
In this context, it is important to underline that it is an unfortunate reality that debt often runs the risk of not being paid, especially when it comes to cross-border business transactions. Enterprises consequently are more reluctant to do cross-border businesses for the simple reason that the uncertainty and the recovery costs increase considerably. Moreover, the reputational risk for many debtors is much lower when creditor and debtor are located in different EU Member States. As a result, trade credit insurance and other instruments coping with trade risk management are often used in cross-border trade, reducing revenue uncertainty but also absorbing an important part of the profit margin, in particular for small enterprises.
Late payments have a negative effect on the functioning of the Internal Market, particularly in times of economic crisis. Even when more prominently manifested in some EU Member Sates compared to others, the deliberate extension of the payment due-date by customers/debtors is becoming a worrying general practice across the EU. This is valid even in cases where debtors are in fact able (in view of their cash position) to settle their invoices in time. It seems that late payment is seen as an alternative way of financing.
In view of the above, the EUF welcomes the proposal to recast the Late Payment Directive aiming at improving the cash flow of European business by providing creditors with the appropriate instruments that enable them to fully and effectively exercise their rights when paid late. The EUF also welcomes the establishment of shortened payment periods, the reinforcement of the disincentives to late payment by a flat-rate compensation from the first day of the delay, and in the case of B2B transactions, the possibility to claim late payment interest and a compensation of recovery costs.
The EUF considers that such measures are necessary in order to comply with the principles of the Internal Market and to foster economic growth and competiveness in the EU, and generally welcomes the European Commission taking up the issue of late payments once more.
However, we do have some concerns that this recast of the Late Payment Directive repeats many of the provisions already set out in Directive 2000/35/EC. Therefore, the EUF would like to see some further modifications introduced through the forthcoming discussions when it comes to the co-decision between the European Parliament and Council of Ministers.
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