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New EU late payment rules to protect SMEs
New rules to introduce maximum payment periods for public and private sectors could be quickly implemented to protect Euro Zone small to medium businesses from the deadly strain of late payments and resultant cash flow problems.
Under the plans, Public authorities must pay their bills within 30 days and companies within 60 days,
According to recent reports, The European Parliament’s Late Payment Directive has been approved by the European Parliament and is now just awaiting implementation. The directive will be formally adopted in the coming weeks and will come into force across all member states within two years’ time. The deadline is the beginning of 2013.
The aim of the new directive is the harmonisation of the payment periods by public authorities to small and medium sized businesses. Public authorities will (under the new directive) have to pay for the goods and services that they procure within 30 days. Under very exceptional circumstances, Public authorities can extend the term beyond 60 days if expressly stated within a contract, (which must be deemed not to grossly unfair to the creditor) otherwise the maximum term will be 60 days.
Companies dealing with other companies will be encouraged to pay their bills within 30 days but they must pay their invoices within 60 days if no contractual period is set. Creditors will also automatically be entitled to claim interest for late payment and will be able to impose a minimum fixed penalty amount of €40 to cover any reasonable costs of debt recovery or debt collection.
Liquidity is essential for business survival, and with thousands of SMEs going under each year as a direct result of customers delaying payment, it is high time for change. Many small businesses are left at the mercy of their debtors who use a range of delaying tactics from the classic ‘your cheque is in the post’ to raising false disputes with suppliers to avoid payment.
The new rules should work towards preventing those debtors from holding creditors to ransom and will help small businesses streamline their credit management function.
The UK has been down this road before with the Prompt Payment Code which sadly, many UK local councils and public authorities are still not signed up to some years after its inception, so a Euro wide enforced directive has been much sought after for some time.
The key question however is whether it will be enforced properly as one potential loop hole could be the phrase “….can extend the term beyond 60 days if expressly stated within a contract”.
In such frantic times where business deals are a much sought after commodity, a firm putting out a contract to be fulfilled could legitimately be state that it requires payment terms of 90 days. The argument as to whether this is or isn’t grossly unfair is surely relative and not one that can be cleared up pre contract? The firm giving out the contract can always claim that the terms were fully understood and agreed to beforehand and if they were ‘grossly unfair’ then the creditor should not have entered into it. There is also an argument to say which is more unfair, not having the contract in the first place, or getting paid after 90 days?
It is wholly conceivable that this scenario could undoubtedly arise were the directive is circumnavigated and unless European Parliament is going to be reviewing business to business contracts before they are signed it is hard to see how this gap in policy can be bridged and firms who are not paying up in 30 days now and extending terms will be persuaded to pay up early.
The wider issue is obviously those firms that simply won’t pay or can’t pay whether the terms are 30, 60 or 90 days and whether expressed in a contract or not and its surely this the directive is earmarked to combat.
Whilst commercial debt is an everyday part of commercial life, and no directive will change that, in addition to the directive, there are measures that can be taken, in both the preventative sense, and the recovery sense after the fact.
By having a suitable and sufficiently robust credit control model such as our Outsourced Credit Control service, and taking advantage of regular business reports to review your customers ability to pay (and whether that ability is going up or down) you can better protect your business from getting itself into a position of chasing debtors and late payments.
But, when the horse has bolted and the debtor days are increasing, services such as Debt Mediation and Debt Dispute Resolution can remove the false complaints from the equation and start the debt collection process to recover your outstanding payments and sales ledger.
Although Corporate Credit Debt Recovery (CCDR) has recovered previously written off debts for our clients, the key is to act fast and act decisively. For more info on how CCDR can reduce your current and future debt, (bad or otherwise) simply get in touch or request a call back via the web site contact page.