BIIA has been following a discussion about the new European Commission Directive combating late payment in commercial credit transaction.  Simon Groves wrote on LinkedIn:

“For SMEs selling to government owned organizations, the revised directive is good news, as it holds those organizations – often cited as Europe’s worst payers – to paying within 30 days. And for those suppliers who – for whatever reason – fail to stipulate a due date in their contracts of sale – it’s also good news, as the 30 day credit period will automatically be applied. I do wonder, though, what – if anything – is going through a supplier’s mind if they forget to state a due date in the contract!

But the implication of the EU directive is effectively that the payment period guarantees timely payment. That patently isn’t the case. No stipulated payment period can guarantee payment on time – that is the product of a good working relationship and of good credit management. The other implication of the EU directive is that the shorter the credit period the better. And that flies in the face of much of what businesses know to be the case: i.e. that longer credit periods can give you a competitive advantage, can show faith in trusted customers, and especially at this time, and can give buyers the time they need to finance their purchases.

The EU directive also allows for penalty interest to be charged if payment is late. In principle, if this is known at contract stage, it can be an incentive to timely payment, but in practice, I wonder if SMEs selling to major customers will apply such interest, for fear of endangering repeat sales.”

BIIA Comment:  This topic has been around for a long time without much success and it is questionable whether individual countries will implement the new directive.  As Mr. Groves said, credit terms are a matter between customers and suppliers and whatever the directive says commercial parties will seek to circumvent it.  Assume for a minute that if prompt payment can be legislated it would help SMEs with cash flow.  Large corporations are said to be notorious in stringing out their suppliers, therefore some enforcement would be helpful.   So assuming that the directive would work, what would be the effect on credit information, collection agencies and on credit insurance?     

EU Directive:  Texts adopted – Wednesday, 20 October 2010 – Combating late payment…

BIIA Newsletter November II – 2010 Issue