Estimated reading time: 5 minutes

Businesses and public authorities across the EU may be facing tougher laws on late payments, with the European Commission proposing a new regulation enforcing maximum 30-day terms.

The proposal, part of a comprehensive set of policies designed to underpin the resilience of SMEs across the EU, is set to revise and replace the 2011 Late Payment Directive with a more stringent EU Regulation. The implications of this proposal have spurred discussions and raised several concerns within the supply chain community.

At the ITFA Christmas event in London, TFG’s Deepesh Patel sat down with Silja Calac, a Board Member at the International Trade and Forfaiting Association (ITFA), to discuss the key novelties of the Late Payment Regulation proposal compared to the existing Late Payment Directive, its potential impact on businesses, especially SMEs, and the recommendations put forth by ITFA to navigate these proposed changes successfully.

The 2011 Late Payment Directive: The need for change

On 12 September, 2023, the European Commission unveiled a proposal for a new EU Regulation aimed at tackling the issue of late payments in commercial transactions in Europe. A fundamental feature of the European Commission’s proposal is to replace the current 2011 Late Payment Directive with a Regulation applicable to all EU Member States once enforced.

Currently, the existing directive stipulates a payment term of 30 days for B2B transactions. However, this can be extended to 60 days or more “if not grossly unfair to the creditor”.

In practice, the absence of a maximum payment term and the ambiguity in the definition of “grossly unfair” has led to a situation in which payment terms of 120 days or more are not uncommon.

The new proposal takes a decisive standpoint, striving to establish a uniform 30-day payment term applicable for all commercial transactions, including B2B, large companies and SMEs while protecting businesses from the adverse effects of payment delays in commercial transactions. It is not yet clear how far this will apply to public authorities though.

The proposed regulation sets forth a comprehensive set of objectives, aiming to combat late payments, rectify imbalances in contractual bargaining power, facilitate timely payments, and fortify redress systems. With a pronounced emphasis on protecting SMEs, the regulation seeks to establish a clear, standardised payment term applicable to all European businesses.

As Calac said, “The current Directive in place leaves much room for interpretation. The European Commission wants to establish a very clear and strict payment rule for all businesses.”

Pending approval by the European Parliament and the EU Council of Ministers, the proposed legislation entails automatic penalties for late payments, accruing interest at 8% above the European Central Bank (ECB) base rates. Notably, these laws encompass every commercial or business organisation and are specifically designed to expedite payments for the EU’s SMEs.

Other provisions include the removal of the right for contracting parties to extend payment terms, a restriction on the creditor’s ability to waive late payment interest, and an obligation on debtors to pay late payment interest on overdue invoices. This comprehensive overhaul reflects the European Commission’s commitment to creating a more efficient and equitable payment landscape, particularly benefiting SMEs.

Diving into everyday business challenges: ITFA’s perspective

While the proposal presents at first glance some commendable measures, such as reducing maximum payment terms for SMEs and reinforcing the enforcement by compulsory interest payments, closer examination reveals that the wider impact of the proposed Regulation requires careful consideration.

Despite the regulation’s intention to support SMEs, ITFA advocates against a rigid, one-size-fits-all model. For instance, Calac referenced a potential challenge for buying SMEs, which often operate on tight margins, in complying with the mandated payment term.

Strict timelines, while aimed at promoting financial discipline, may inadvertently burden SMEs as buyers/debtors, constraining their ability to manage cash flow effectively and allocate resources efficiently.

She said, “This will backfire when SMEs act as the buyer. For them, they will need to seek additional funding resulting in higher financing costs, particularly since it will not be based on the rating of their better-rated buyer.”

Moreover, limiting businesses’ ability to freely negotiate extended payment terms tailored to their unique circumstances is highly likely to disproportionately affect industries with complex supply chains and lengthy capital cycles, particularly impacting SMEs.

Such a stringent approach overlooks the diverse nature of industries, distinct business models, and variable financial capabilities of SMEs. Consequently, it unintentionally infringes upon the right to freedom of contract, restraining negotiations that might better serve the parties involved.

As Calac emphasised, “This is not ideal in a free economy. The German Association of Lawyers (Deutscher Richterbund has already expressed its concern as this regulation would be against liberal economic principles and the freedom of contracting. It is also what ITFA fears can be the detriment of SMEs.”

Besides, the proposed 30-day limit of payment terms could be detrimental to the competitiveness of EU suppliers and buyers engaged in transactions outside the EU.

International settings commonly involve longer payment terms, and constraining these terms could result in a competitive disadvantage for EU-based companies. Although the freedom of contract would be maintained in B2B transactions outside the EU, EU-based companies operating internationally might be compelled to require shorter payment terms, diminishing their attractiveness compared to their non-EU counterparts.

The Commission’s proposal for the Late Payment Regulation recognises an opportunity to enhance competitiveness through improved payment discipline which can undoubtedly provide valuable support to SMEs.

However, the present proposal brings along unintended consequences that could jeopardise the very businesses it seeks to protect. Therefore, a nuanced approach is essential, one that achieves a delicate balance, safeguarding SMEs while acknowledging and addressing the specific complexities of different situations rather than applying a one-size-fits-all solution.