Late payment legislation: rule of law or business choice?

Late payment is unfortunately common in the business world, causing cash flow difficulties for small and medium-sized businesses and even threatening their survival. Various attempts have been made on both the European and national levels to tackle the problem but is enough being done?

Intrum’s latest European Payment Report canvassed views on the issue of payments and legislation, finding opinion differs on whether new laws are needed or if prompt payment is better achieved through voluntary initiatives.

Four in ten of the 11,007 respondents called for the introduction of new national legislation to tackle the issues of late payment and long payment terms, while more than a quarter went further and said they wanted payment terms to be fixed in law. However, a third said voluntary initiatives by corporates would solve the problem.

Mixing the two approaches

In Sweden, both approaches are being taken forward together. Along with voluntary payment code launched in 2018 by SME associations, large companies will have to report their average payment times and proportion of late invoices to SME companies from next year.

This combination of voluntary and legislative intervention is a positive step. Across Europe, while we see excellent voluntary codes in place, we also continue to see SME businesses acting as banks for their larger customers, a situation that places them under great pressure.
Vanessa Söderberg, Global Sustainability Director

Other countries also operate voluntary schemes. For example, in the UK, a voluntary payment code launched by the Small Business Commissioner now has around 300 signatories, while similar codes exist in France and the Netherlands.

European Late Payment Directive

Others question whether national legislation is needed. After all, the European Late Payment Directive already applies in all member states. Adopted in 2011, the Directive was designed to combat commercial late payment.

It provides that:

  • Public authorities have to pay for goods or services within 30 days (or in very exceptional circumstances 60 days)
  • Businesses must pay within 60 days unless expressly agreed
  • Businesses are automatically entitled to interest and a minimum 40 euro recovery fee
  • Statutory interest of at least eight per cent above the European Central Bank’s reference rate.

Unfortunately, the Directive isn’t perfect by any means, and many do not exercise the rights it provides. More than half of the 11,007 companies surveyed never charge the €40 minimum fee they are entitled to as compensation for recovery costs, and only 16 per cent said they charge this fee all the time.

Making the most of existing powers

Businesses surveyed for the European Payment Report 2022 expressed a need for both clarity and enforcement when it comes to these powers.

More than half said a review of the existing rules is needed, while four in ten said they would exercise their rights provided under the Directive more if there was improved enforcement. More than a third wanted stronger mediation and 28 per cent desired greater clarity around the legislation and how it can be used.

“More could be done to enforce the Directive, but many businesses are unaware of the options they have to charge interest and a recovery fee,” says says Vanessa Söderberg, Global Sustainability Director. “Small firms may have more power than they realise when it comes to tackling late payment. They should familiarise themselves with their rights under the Directive and consider using those options when they struggle with late paying customers.”

Their powers may also be growing. In our report, businesses acknowledged the importance of paying small suppliers on time – 71 per cent said large businesses have a responsibility to do so. Long payment terms and late payment are also increasingly becoming ESG reporting concerns, suggesting late paying offenders will come under pressure to mend their ways.
adds Söderberg

Read the full report

The insights from this article are based on the European Payment Report 2022. You can download the full report below.