Cracking the code - European prompt payment initiatives

As Europe’s SMEs push for a solution to the persistent issue of late payments, could voluntary prompt payment codes be the answer? Or should the authorities step in? Intrum has taken a closer look at some of the ongoing European initiatives for quicker payment.

In recent years, Europe’s small and medium-sized enterprises (SMEs) have become better at advocating for quicker payment for their services within the industry standard 30 days, with the help of key industry actors like Intrum.

But it’s still a live issue. Intrum’s 2018 European Payment Report found that six out of ten companies say they’ve been asked to accept longer payment terms than they can cope with, stopping them from growing and recruiting, or even threatening their survival.

In 2011, the European Union sought to address the situation with its Late Payment Directive, but it hasn’t caught on. The European Payment Report reports that only 28 percent of the companies surveyed are aware of the directive’s existence. Of those, a mere 19 percent think it has had a positive impact.

Does France have the answer?

For some SMEs, legislation is the only answer. They are fed up of being, in their eyes, a lending resource for large companies with much bigger cash flows. But does it work?

France takes a ‘carrot and stick’ approach that mixes legislation and a voluntary agreement.

If there is no specific period of time decided between the buyer and the supplier of the service, another period of 30 days from the day of reception of the goods or from the execution of the requested service is applied. 

But if the payment period has been negotiated between the parties, this period cannot exceed 60 days from the date of the bill. Both parties can also agree on a period of 45 days, from at the end of the month the bill has been created. 

There are some who still don’t respond to that flexible approach.

The national mediator for French companies says that 30 businesses a day close because of unpaid debts, while the Banque de France calculates that late payments mean a loss of revenue of around 16 billion euros for SMEs (25% of these businesses’ failure is a direct consequence of late invoice payment). FIGEC, the professional federation for companies information and debt collection, estimates that 56 billion euros of payments are written off as a result.

That’s when the stick comes out.

Every year, the Banque de France’s late payments observatory gathers information about late payments in the business to business and public sectors using data collected by Intrum, Altares and industry federations. This information is then published online for all to see by the Directorate-General for Competition, Consumer Affairs and Fraud Control (DGCCRF).

But does this ‘name and shame’ approach work? It may yet be too early to tell, and, if anything, the trend is going upward as more attention is focused on the problem.

In 2017, 230 companies were sanctioned for a total amount of 15 million euros, while in the first quarter of 2018, the DGCCRF has assessed over 1,500 companies including some in the public sector) and delivered 116 fines for a total amount of 6.9 million euros with a maximum individual fine of 375,000 euros.

Does the UK approach work? 

In the UK, the Prompt Payment Code was established in 2008 to set standards for payments and best practice. It is administered by the Chartered Institute of Credit Management on behalf of the Department for Business, Energy and Industrial Strategy. Compliance with the principles of the Code is monitored and enforced by the Prompt Payment Code Compliance Board.

The code’s signatories resolve to: pay suppliers on time, within a maximum of 60 days, but aims to work towards 30 days as the norm; give suppliers clear guidance on payment procedures; and, encourage good practice throughout their supply chains.

But, the issue of customer relationships and the purchasing power of a much bigger company as a customer means that in many cases they have 90 days re-payment terms because there is so much competition for the big companies’ business among SMEs. Ultimately, given that the Prompt Payment Code is a voluntary code, the anecdotal, though not scientific, evidence is that most companies adhere to it but that’s not always the case.

As Eddie Nott, the Managing Director of Intrum UK, points out, "Despite the existence of a voluntary prompt payment code and recent European legislation, late payment remains a problem for British businesses.

“In a spring statement the government pledged that it will take action and we await the next steps. In the meantime, many businesses continue to use their power over small suppliers, hampering the growth and security of those businesses.”

A long way to go

As Sweden discusses the possibility of legislation and has developed its own industry-based understanding for voluntary prompt payment (with push coming from government), it’s clear that although the issue is much more widely recognized, there’s still a long way to go and continuous efforts for prompt payment are needed.