EU Federation for the Factoring and Commercial Finance Industry

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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


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.


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.

The EUF's is primarily concerned by the following

  • We believe that stricter enforcement measures should be put into place as the Directive in its current status may not prevent (especially public) debtors from paying late.  We see that some Member States are still facing difficulties in relation to the implementation of the previous Late Payment Directive. The current amendments made to the 2000/35/EC of the European Parliament and of the Council on combating late payment, we feel are not sufficient to ensure the public sector pay by required deadlines.
  • We fear that the introduction of provisions establishing interests rates and compensation costs in favour of creditors, may not be sufficient to disincentivise late payers.
  • The EUF also encourages decision makers to further address problems such as the enforcement of the judgement and titles, in particular with regard to the different enforcement costs amongst Member States, which are the main reason for putting creditors off when fighting for their rights.

The EUF welcomes the reissuing of the late payments directive, but believes that this proposal to amend the existing directive will not bring about significant practical changes to the current situation unless further enforcement measures are taken into consideration simultaneously.

The EUF is the Representative Body for the Factoring and Commercial Finance Industry in the EU. It is composed of national and international industry associations that are active in the EU.

Factoring is a method of business financing: a company sells its accounts receivables to a factoring company at a discount in exchange for immediate liquidity with which to finance continued business. Factoring is especially attractive to small and medium-sized enterprises, particularly during periods of rapid growth, because cash flow is preserved and risk eliminated. Larger companies may also use Factoring services as a practical tool to provide additional working capital, by financing their domestic and international trade transactions.

The EUF seeks to engage with Government and legislators to enhance the availability of finance to business, with a particular emphasis on the SME community. The EUF, acts as a platform between the factoring and commercial finance industry and key legislative decision makers across Europe bringing together national experts to speak with one voice.

The EUF offers itself as a source of reference and expertise between the factoring and commercial finance industry and key legislative decision makers across Europe. Its aim is to provide legislators and policy makers with vital industry information to inform, influence and assist with the direction of existing and future finance legislation with a view to ensuring the continued provision of prudent, well structured and reasonably priced finance to businesses across the EU.

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