Less than half of all UK credit managers (48 per cent) believe that the new EU Late Payments Directive, which is to be introduced by the beginning of 2013, will have an impact when tackling late payments, according to research conducted by Graydon UK the commercial credit reference agency.
The survey finds also that 54 per cent of UK companies have experienced their suppliers attempting to change their payment terms without prior consultation in the last twelve months. Indeed, one in five (20 per cent) have experienced this on multiple occasions during this time frame.
Further, half of all companies (50 per cent) have experienced their large customers asking for a discount if their payment is simply made on time during the course of the last year.
The EU Directive is intended to ensure that all private companies and public bodies settle invoices in 30 days, although in the private sector, buyers and sellers can contractually agree longer terms provided the terms are not “grossly unfair” to the creditor. Public bodies would have 60 days at most to pay their trade bills under the new rules. The European Parliament has also demanded that any public body failing to adhere to these terms can then be subjected to a flat rate compensation of five per cent of the amount owed plus interest. In such circumstances suppliers can also charge their debtor 40 Euros for costs of recovering the debt.
Martin Williams, Managing Director of Graydon UK, commented: “Unless this directive is enforced effectively then it will suffer a similar fate the UK’s 1998 Late Payment of Commercial Debts Interest Act, which as our research suggests has not been universally effective. Although the EU should be applauded for taking the incentive to try and improve the situation we currently find ourselves in.”
The EU has looked to address the scenario affecting many SMEs after it found that there was €1.9trn of late payments in the European economy during 2009, €1.1trn of which is owed to SMEs. The directive is designed to halt this trend freeing up some €180b of liquidity to businesses across all industries in the EU, while providing the much needed protection SMEs have been looking for.
Martin Williams added: “This new legislation does not attempt to address some of the most significant problems facing SMEs as purchasing power continues to shape commercial relationships in the worldwide capitalist market. There is no utopia where all firms are equal. Suggestions that small firms are going to be able to hit back hard and consistently against larger trading partners are unrealistic. Smaller companies are naturally frightened of losing valuable customers if they push too hard for their statutory rights.”
“Company owners and credit decision makers should enter into trading relationships with their eyes open. In order to maintain a healthy cash flow position, firms need to credit vet new business applicants, and monitor the ongoing payment behaviour of existing customers; relying on legislation for prompt payment will never be enough.”
Forum of Private Business chief executive Phil Orford said: “While commendable in spirit, the new EU Directive does give big companies considerable scope to continue squeezing their suppliers and this probably explains the sense of scepticism among credit managers.
“Giving provision for buyers and suppliers in the private sector to ‘agree’ on their own terms will, in reality, allow late payment practices to continue unabated, and the clause requiring terms not to be “grossly unfair” to the creditor is a rather ambiguous one which I expect would be incredibly impractical to enforce.
“The findings of this research also underline the seriousness of the late payment issue. The figures
concerning companies which have had to deal with attempts to change payment terms are quite startling and reinforce the view, which I put across to a select committee hearing just this week, that late payment is currently the biggest threat to the survival of smaller businesses.”
Mr Orford added: “Like Mr Williams, we at the Forum believe that, while useful, legislation alone is not enough to tackle the late payment problem. There is no quick fix solution but better financial reporting and transparency is essential.”
Further information can be found at the Forum of Private Business late payment ‘Hall of Shame’, which lists the names of big companies who squeeze smaller suppliers.
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