Late Payment Directive, a good idea or not?

Late Payment Directive, a good idea or not?

Project of EU Directive on late payment and payment terms. There are some confusions with potentially serious consequences for the economy

Combating late payment seems to be a major objective at a time when many companies are suffering from a lack of liquidity. But the very title of this draft Directive confuses "delay" with "terms” or “deadline". Can we impose a deadline on everyone? This is the thorny question that needs to be asked, without anyone having a satisfactory answer for everyone. And therein lies the rub. We're all agreed on the objective, but less so on the way... What about it? By trying to do better, we sometimes do even worse. We're not convinced that only companies will be penalized. What about certain banking businesses, for example? ?

People may think that EU regulators ignore the reality.

Don’t you think that EU Regulators are ignoring the reality of some companies and mainly the smallest ones? Late payment undermines the competitiveness of companies, slows growth, and creates a climate of mistrust. Combating late payment is a priority. In some countries, the payment terms can be extended to 30, 60, 90 or more days (or 45, 75, 105, etc.… days end of month) by agreement between the parties. There are also local and national or sector practices and uses, tough to modify. But the recent draft regulation from the European Commission intends to reduce the maximum payment period to 30 days, with no derogation from this rule. Corporates in general are opposed to this.

At first glance, the intention seems laudable, but it confuses late payment with payment terms. If the former are to be combated the former, the latter must be able to adapt to market realities. Increasing payment terms to 30 days for all companies, in all sectors and in all situations, without taking into consideration specificities, without ever being able to derogate from it, ignores business realities and contravenes the principle of contractual freedom. In law, there is a principle that says, “a contract makes the law between parties”. Would it be conceivable? In theory yes, in practice, certainly not. Although treasury associations defend (usually) larger MNC’s, we need to also consider SME’s. The SMEs would undoubtedly be the most penalized, as they would be unable to adapt. Against a backdrop of high interest rates, this would put a heavy strain on their cash flow. Lot of small stores will have to pay their suppliers twice as early. But will it be able to sell its goods twice as fast?

In business, we also have the seasonal activities, such as jewelry, food, sports, or toy shops, for example. I am not sure we should treat them the same as all other businesses. Most economic players pay on time, even if there are still a few exceptions among the largest. Of course, there are local, industry, specific, etc. exceptions among the largest companies, local authorities, and public administrations. A German corporate may pay faster than a Greek one. An Italian hospital pays certainly later than a small Dutch SME. That is a fact and the public administrations are never known as “on-time” payers, although they are usually “good payers”. The average late payment rate in Europe certainly optimal and should be improved. In this context, why resort to such a drastic measure when the situation calls for a targeted approach? People believe that such a reduction in payment terms would not automatically lead to a reduction in late payments. On the contrary, it would have a destabilizing effect on companies and create a de facto distortion of competition in favor of suppliers, and more specifically in favor of non-European suppliers. We should contemplate a pragmatic solution, applicable to all (easier to say than to find). Payment terms are a delicate balance. Let's be careful not to hinder economic growth, the reindustrialization of full employment by jeopardizing our companies with a brutal and ineffective measure.

It seems tricky to determine the right method for all cases. Differentiating between small, medium-sized, and large companies would be feasible in theory, but complicated, if not impossible, in practice. A rule flanked by multiple exceptions wouldn't make much sense either. Shouldn't we instead target late payments and "capper" delays with heavy interest penalties that are easy to apply? Shouldn't we leave the parties a little freedom? Getting paid earlier for a farmer, for example, also means paying his suppliers sooner. The supermarket business model would be completely turned upside down and modified. Perhaps to the detriment of the customer, who would pay more for his food. Entire banking businesses could disappear with such a measure. In practice, it would be complex to monitor. As the saying goes, the best is the enemy of the good. So, let's be careful not to "kill” the already ailing economy. Nobody has the answer, so complex is the subject and so insoluble is the equation. Let's remain attentive to avoid an inextricable situation.

Fran?ois Masquelier, CEO of Simply Treasury – Luxembourg February 2024

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Disclaimer: This article was prepared by Fran?ois Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).

Luis Montesinos Ballesteros

Group Treasurer at GRUPO LANTERO

9 个月

This is a tricky subject indeed and failing to implement it right may bring about counterproductive consequences for many companies. The underlying issue is really to come out with a genuine agreement between the parties to establish the contractual payment terms in each case. We are all longing to have a fair and efficient legal framework taking into account the existing differences among countries and industries. However, rushing to align the applicable rules may end up being a big mistake.

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