European Parliament adopts regulation making it easier for companies to be paid on time

The European Parliament this week overwhelmingly voted for the adoption of a new Late Payment Regulation that will make it easier for businesses to be paid on time for their goods and services.

Member states still need to vote on the regulation before it comes into force, but the Parliament’s vote is seen as a major step forward toward its adoption.

The Late Payment Regulation stipulates:

1. In Government-to-Business Transactions, the maximum credit terms allowed shall be strictly 30 days. This should help private companies to get paid promptly when dealing with government authorities and should enhance cash flow within the economy.
2. In Business-to-Business Transactions, the maximum credit terms are stipulated at 60 days given that both parties mutually agree. If the two parties do not enter into an agreement, 30 days credit terms shall apply.
3. For slow moving goods, seasonal products and services, and products that have long business life cycles, credit terms up to a maximum of 120 days shall be allowed upon mutual agreement between the two parties.
4. In public procurement, sub-contractors in the supply chain should also be paid on time by the contractors.
5. In case of late payment, the creditor cannot waive the interest rate of eight per cent plus ECB rate (of 4.5 per cent, for a total rate of 12.5 per cent).
6. A minimum late payment penalty fee of €50 shall also be charged to the debtor failing to pay on time.
7. The creditor should not be prohibited to use factoring or other third-party services in the management of cash flow and collection of dues.
8. Every member state should have an enforcement authority to ensure that payment deadlines are strictly adhered to.

It should be noted that the book sector is excluded from this regulation.

In a statement, the Malta Association of Credit Management (MACM) welcomed the vote, particularly the inclusion of the provision allowing certain B2B transactions to benefit from 120-day payment terms. It did however point out that the industries able to make use of this extended period have yet to be identified.

It also warned that the concept of freedom of contract between parties is still being curtailed through the regulation. The European Commission, in explaining its reasoning behind the strict enforcement of credit terms and justifying its butting into contracts between two parties, argued that many credit terms are negotiated between parties of vastly unequal power, rendering the freedom of contract principle a moot point.

Another concern raised by the MACM – not for the first time – is that SMEs are very often themselves the buyers, so forcing them to pay their suppliers within a set period of time may put them in financial difficulties. Some, it added, may need to find alternative financing, which may be more expensive and cumbersome on the operation of the business.

On this point, the European Commission argues that late payment creates a domino effect that leads to more late payment, citing a survey showing that 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.

“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,” said the European Commission.

However, the new regulation, warns the MACM, will limit suppliers’ ability to extend more favourable credit terms to those clients that may need a bit more leeway.

These problems, said the association, may lead buyers to find alternative suppliers from outside the EU.

On the other hand, the MACM said it is pleased to note that the European Commission is suggesting other proactive initiatives to combat late payment such as training in cash flow management and credit management: “Trained employees would lead to good credit management practices in the market which would help to secure sound cash flow within the business community.”