The Malta Association for Credit Management (MACM) has hit out against a proposal by the European Commission to mandate that payment for goods and services must be completed within 30 days, arguing that it will be “to the detriment of the economy, commerce, trade and businesses, especially to SMEs.”

The new rule would form part of an update to the Late Payment Directive, which is now being proposed as an EU-wide Regulation that does not need transposing into national legislation.

The existing directive lays down a payment term of 30 days in B2B transactions. However, this can be extended to 60 days or more “if not grossly unfair to the creditor”.

In practice, the absence of an effective maximum payment term and the ambiguity in the definition of “grossly unfair” in the directive has led to a situation whereby payment terms of 120 days or more are often imposed on smaller creditors, according to the Commission.

The new proposal instead introduces a single maximum payment term of 30 days for all commercial transactions, including B2B and transactions between public authorities and businesses. This term will be the same across the EU.

The MACM said it welcomes the fact that the European Commission acknowledges that late payment hinders businesses and economic growth, and “is pleased to note that a Late Payment Regulation has been suggested to combat late payments.”

The revision aims to bring fairness in commercial transactions, increase the resilience of SMEs and supply chains, foster a more widespread use of digitalisation and improve the financial literacy of entrepreneurs.

In addition, the proposal introduces stricter and more streamlined measures to prevent late payment practices in the form of maximum payment terms, ensures that the payment of accrued interest and compensation fees is rendered automatic, as well as lays down new enforcement and redress measures to protect creditors against bad payers.

The introduction of maximum payment terms is the main issue of concern for the MACM, in line with that expressed by the International Chamber of Commerce, which last month said the limit “inadvertently infringes upon the fundamental right to freedom of contract, impeding organic negotiations that might better suit the parties involved.”

The European Commission outlined its rationale for the 30-day limit for commercial payments, noting that late payments have a major impact on SMEs: “One in four bankruptcies are due to invoices not being paid on time. One of the root causes of late payments is asymmetries in bargaining power between a large or more powerful client (debtor) and a smaller supplier (creditor). This often results in suppliers having to accept unfair payment terms and conditions.”

It continued: “In the EU, on average, one out of two invoices in commercial transactions are paid late (or not at all). Late payments increase in times of crisis and economic turmoil. SMEs, who rely on regular and predictable streams of cash to operate, are more vulnerable to the risk of being paid late and to its damaging effects.

“Late payment creates a domino effect that leads to more late payment. In Europe, 70 per cent of EU companies confirmed that being paid on time would in turn also allow them to pay their own suppliers on time.

“In general, late payments reduce businesses’ competitiveness, increasing financing costs and causing companies to forego attractive business or investment opportunities, for example investing in the green and digital transitions. A one-day reduction in payment delays would increase EU companies’ aggregated cash flow by 0.9 per cent and could save them €158 million in financing costs.

“Late payments also increase the risk of bankruptcy and reduce trust and confidence in the market. This can result in job losses, and reduces participation of SMEs in public procurement, which can negatively affect the provision of essential services like medical care, public transport, law enforcement or others, to the community. Late payments also seriously affect the livelihoods and well-being of small entrepreneurs.”

Despite the ostensible benefits, the MACM said it is “of the strong opinion that freedom of contract should remain, and imposing a maximum of 30 days credit terms is to the detriment of the economy, commerce, trade and businesses, especially to SMEs,” adding that such a limit “goes against the free market” and “goes against the fundamental principles of credit management.”

The MACM added that a 30-day maximum limit “does not work for certain industries with longer business life cycles and seasonal products,” noting that “very often SMEs are themselves buyers and will not be able to negotiate competitive credit terms.”

With invoices mandated to be paid within 30 days, it said, many businesses will need to find alternative financing which may be more expensive and cumbersome on the operation of the business.

All this apart from the negative impact the proposed regulation would have on existing long-standing business relationships, and the impetus it would give buyers to find alternative suppliers from outside the EU.

Finally, in spite of the claim that the imposition of a maximum term would improve companies’ financial health, the new rules would also tie suppliers hands and preclude them from assisting clients finding themselves under temporary financial strain.


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