EU Proposes New Rules on Late Payments
April 24, 2009, by Riki-Lee Ritz
In accordance with its objective of sustaining a Single Market, in 1995 the European Commission issued a directive to all EU Member States calling for legislation to combat the endemic problem of late payments by companies and public organizations. While the recommendations were adopted in varying degrees, providing some improvement, the recent credit crisis and subsequent economic recession have sent the average late payment delays back to pre-1995 levels. Given the lackluster results of the initial directive, the EC is proposing new rules which will likely be drafted into law by 2010. The new rules target those enterprises that are the biggest late payment offenders. They also identify those that are most vulnerable to the economic effect of late payments. Late payments have the greatest impact on SMEs
(Small and Medium-sized Enterprises). This is particularly so during a recession when they have difficulty obtaining capital. SMEs are vulnerable because they do not have the financial resources to compensate for the additional administrative costs that result from having to deal with late payments. In addition, during times of recession, SMEs face heavy lay-offs and the threat of insolvency. Because they rely on a smaller client base, SMEs are reluctant to enforce stricter payment terms on their own, not willing to risk losing or offending a customer. While a single SME represents a minute fraction of the European economy, collectively they represent more than 50% of all businesses in the EU. As a result, the EU places a great deal of importance on the success of SMEs. Public authorities and institutions throughout the EU are notoriously late with payments to their suppliers. Although averages vary considerably from country to country, recent estimates indicate that these public enterprises take an average of 65 days to pay their bills. The new proposals specifically target public authorities throughout the EU. Included among those entities considered the biggest offenders are the public health sector, providers of public utilities, and the government. The governing bodies of the EU, including the European Commission, have publicly acknowledged their faults in terms of paying their suppliers on time. To demonstrate their firm dedication to reducing late payments, the EU is implementing vendor payment practices for all their internal organizations. The methods the EU is recommending to combat late payments focus on providing creditors the means to assert their rights in the face of late paying customers, as well as implementing rules to dissuade late payments. Primary recommendations include:
- Public authorities must pay invoices within 30 days unless otherwise indicated in a contract.
- Failure to pay those invoices within 30 days requires the public authority to compensate their creditor by paying interest at a statutory rate, as well as 5% of the total amount of the invoice. The EU recognizes the financial cost to creditors when invoices are paid late, including debt recovery and administrative costs. The 5% charge is intended to compensate for those costs.
- Businesses will not be prohibited from entering into contracts that are outside the recommended 30 day payment period. Contractual freedom is a vital method of competing in all markets, and it is only when a contract includes "grossly unfair" payment terms that the EU will prohibit extended terms.
At this time, these practices are limited to public authorities within the EU. There is a strong consensus, however, that in the future the recommendations will be extended to all EU businesses to further strengthen the Single Market. In that event, international creditors of EU businesses will also have to adjust their practices concerning their EU customers. The above article originally appeared in ABC-Amega's free newsletter, Credit-to-Cash Advisor. ABC-Amega Inc is a providor of 1st and 3rd party commercial collection services since 1929, and collecting in more than 200 countries worldwide. For further information, contact info@abc-amega.com. Riki-Lee Ritz is Senior Account Executive in the International Department at ABC-Amega Inc. She received a B.A. in French language and literature and is a bilingual account executive in the international department at ABC-Amega. She manages claims in Europe as well as francophone countries in Africa and the Caribbean.
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