September 2023

2023-09-05 15:05:23

Late payments are problematic for SMEs, they can lead to cash flow problems, but also bankruptcies. At European level, a revised directive might improve the situation.

In the European Union, one in four bankruptcies is due to late payments. These extended delays, which may be the result of companies or public entities, have a heavy impact: their annual cost for the European economy is greater than Finland’s total GDP.

“If a store decides not to pay…”

For entrepreneurs, they are synonymous with salary, investment and cash flow difficulties, not to mention the psychological burden they generate.

In France, stylist Caroline Dart knows something regarding it, she runs a clothing company called Start With Gratitude. “We regularly create small capsule collections that I design myself,” she explains. “Today, we are starting to develop B2B, that is to say that we sell to shops, it is a new strategy with its strengths, but also its points that are less easy to manage,” she points out. “If a store decides not to pay, we have a problem on our hands and if that problem multiplies tenfold, the situation becomes really difficult and stressful,” she confides.

“When you’re self-employed, there’s no guarantee of getting a salary at the end of the month, that’s the big difference, it takes a lot of time and effort to get that money back,” points out the stylist. “So if you know that in any case following 30 days the bill will be paid, that changes things dramatically for our stress levels, our sleep,” she believes, referring to the improvements that might result from the revision of a European directive.

What European response?

Today, late payments are not supposed to happen: 23 years ago, the European Union introduced rules to protect creditors, especially small businesses.

Retail, construction and the food industry are the hardest hit sectors. The hunt for late payments costs European businesses €275 billion every year and there is a domino effect, with each late payment causing four others.

The Late Payments Directive specifies that public authorities must pay within 30 days. Businesses have up to 60 days to settle their debts, while corporate creditors are entitled to interest on arrears.

The revised European directive promote a culture of prompt payment, tackle abusive contract practices and empower small businesses to protect their rights.

Proposals will be published during the month of September and will then be debated by the European Parliament.

SMEunited : “We want a maximum limit on payment terms”

It is perhaps unsurprising that small businesses are the hardest hit. Véronique Willems, general secretary of SMEunitedexplains why. “When you make a product or provide services and you don’t receive payment for providing those services to your customers, it impacts your working capital,” she points out.

And here is what Véronique Willems hears regarding the new version of the late payment directive: “We certainly want a maximum limit on payment terms: 30 and 60 days, this is what we are asking for trade between companies and public authorities and for trade between companies respectively,” she indicates. “Second, it would address the current concept of gross injustice which is very vague,” she believes.

“An imbalance in terms of power” according to the importance of the economic operators

Construction is the sector most affected by late payments. There European Builders Confederation represents SMEs and building craftsmen in the Union.

Its secretary general, Fernando Sigchos Jimenéz, explained to us why the long value chains between players in the construction sector cause problems for those at the end.

“Sometimes there is a discrepancy with the fact that the main contractor, generally larger economic operators, pushes them to wait for the whole project to be delivered in order to pay the various players who have intervened: this creates an imbalance in terms of power,” regrette Fernando Sigchos Jimenez.

An obstacle to sustainable transition

The European Green Dealwith its targets for solar energy and sustainable buildings, means that the building sector is under pressure to meet them.

“Going to a greener way of building requires investing, either in people or in innovation, and that’s something that’s being nipped in the bud because of the late payment situation,” he believes.

Due to Covid, Brexit and the war in Ukraine, European companies have been hit hard in recent years. But a proper review of the Late Payments Directive might put them on a path to a safer future.

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