28 Nov 2010 EU Legislation to Tackle Late Payments
It’s standard business practice. Chase customers for payment as soon as possible and pay your suppliers as late as possible. Cash is king and in some industries – retail being a prime example – cash flow is the pivot of profitability that can make the difference between success and failure. But for small business way down the financial food chain late payment by their customers has become an increasingly critical issue as banks continue to keep a tight grip on their cash and in Europe and the regulators are determined to do something about it.
In October the European parliament approved legislation to crack down on late payment tactics of big business. The aim is to encourage business to move away from 60, 90 and even 120 day payment terms to 30 days and allow small businesses to claim interest when payments are made late and recover cost associated with chasing late payers.
This legislation is designed to tackle what has been described as one of Europe’s most important issues. German Socialist MEP Barbara Weiler,is reported as saying “‘It will have one of the biggest impacts you can think of.”
But what will it really mean?
Purchase to Pay Perceptions
The perception seems to be that late payment is always a bad thing and that prompt payment always good The legislation aims to encourage payment within 30 day
s but it gives suppliers an escape clause by enforcing 30 day terms “unless agreed otherwise in a contract”. This makes it easy for businesses to escape the legislation by taking care on the terms and conditions they impose for the supply of goods and services.
And in practical commercial terms, do the EU law makers not appreciate that business in Europe is often in competition with the rest of the world? Imposing what could in some cases be a significant and costly new way of working could have a dramatic effect on the books of European businesses who will be encouraged to source in alternative markets outside of the EU.
Let’s see the governments of Europe eat their own breakfast. Will Greece suddenly begin to pay in 30 days – or Ireland? If they do – who will fund this sudden gear change in cash requirement? Will the EU have to find yet more bail out cash?
And there is one further and fundamentally important problem with this legislation. Big business abusing the relative weakness of it’s smaller suppliers is like the big bully in playground stealing the little kids lunch money. How do you resolve that problem? By saying to the little kids “Sort it out yourself – we’ll be right behind you when you do”? Of course not! The little kid needs the support of someone bigger than the bully. If the issue of late payment is to be resolved, it needs to be done in a commercially sensitive way and sorted by government themselves – not small business.
This is typically European. It’s heart is in he right place and it’s intentions to help facilitiate trade across country boundaries by building confidence and consistency are sound. But it is likely to be ineffective. What would be more effective is legislation to encourage business to take more seriously their obligation to pay to terms agreed between buyer and suppliers by encouraging the wider use of purchase to pay techniques and technologies such as electronic invoicing that make payment processes more accurate and easy to manage. The responsibility for raising the issue of late payment should not be on the shoulders of the small business – no one bites the hand that feeds them. Payment to terms performance should be publicly reported and poor performance penalized. We’ll still have extended payment terms but they will be agreed in advance and will serve the purpose of all parties.
While the banks remain unable to oil the wheels of commerce, suppliers and buyers should be working together – without the banks – to ensure mutually profitable relationships.