One of the EU's principles is the free movement of goods and services. This flexibility, and the economic growth it creates, is hindered by late payments. Small and medium-sized enterprises (SMEs) are especially vulnerableto cash flow problems.

Late payments hurt everyone. But especially SMEs, when larger companies and organizations don't pay their bills on time. Delaying payment usually does not entail a signifi cant risk for large companies, since their suppliers in many cases are dependent on them. For smaller companies, on the other hand, it can create cash flow problems, which in turn can slow growth and even threaten their survival.

The EU Commission hopes that SMEs will generate a significant share of Europe's growth. That is where jobs can be created and where growth can be stimulated by free trade between EU member states. In reality, this has yet to happen. The results from the European Payment Index clearly show that European business executives cite payment uncertainties as the most important obstacle to international trade.

Late payments and payment losses
In addition to impacting companies' liquidity and delaying new investments, late payments slow the growth in international trade. The diagram below shows how an average company uses the capital it generates by working more efficiently with unpaid receivables.

The largest share, 35 percent, goes to investments that make the company more competitive. In other words, investments that lead to higher growth. The rest is divided between improving the company's liquidity and paying off bank loans. A small share is used to pay suppliers earlier.

Not only late payments but also payment losses are a serious risk for businesses. In total, payment losses in Europe rose from 1.7 percent in 2004 to 1.9 percent two years later.