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Is the EU Directive on Combating Late Payment in Commercial Transactions Coming Soon?

A new EU directive on Combating Late Payment in Commercial Transactions is soon to be passed. In the latest SCHUMANN Insights, we discuss its implications for small and medium-sized companies.
Blog Post, Schumann Insights
30.05.2024, Prof. Dr. Matthias Schumann

EU Tightens Measures against Late Payment in Commercial Transactions

The EU has presented a new directive on late payment, which is already in an advanced stage of the approval process and will be discussed further after the European elections. This new regulation will replace older legislation and provide more clarity and security, especially for small and medium-sized companies. After it has been passed, the directive will take effect in the member states. The question remains, however, whether this will really result in improvements for credit management because the directive only applies to B2B transactions and for business with customers in the public sector.

The currently valid legislation usually assumes a payment term of 30 days, but allows periods of up to 60 days. The new text allows for an upper limit of 30 days both for the agreed payment period and for the acceptance and review procedures. Shorter payment periods are generally positive but a variety of individual situations need to be taken into account, especially in the case of complex supplier performance reviews. So more flexibility is required, also for example when supplying customers with low liquidity, where payment plans can be an advantage. The argumentation that the new legislation will protect small and medium-sized companies needs to be investigated because even in this context there are some doubts.

The New Stipulations and Their Effects

Special Rules for the Building Industry

In the building industry operating in the public sector, companies that work with subcontractors will also need to prove that the participating subcontractors are being paid on time. The question arises as to why this is required specifically for this area when highly distributed fulfilment of contracts now takes place in many sectors. This rule will create more bureaucracy, which will certainly increase costs because the customer will then have to check transfers of payment in complex construction consortiums.

Automatic Late Payment Interest and Payment Reminders

Another change affects payment reminders. They are no longer necessary because interest on late payments will be due automatically. Here, however, the processes under civil law regarding default interest and the assertion of default by the creditor should be retained. The automatic process is insufficient, for example in the case of complaints or disputes about the performance of the supplier.

Flat-Rate Compensation and Flexibility

In addition, the proposed directive includes automatic flat-rate compensation as recovery costs for each individual business transaction - over and above the costs that need to be proven. If non-performing receivables are sold or transferred, this lump sum often will not apply to the individual circumstances, which is why more flexibility would also be desirable here.

Prohibition of Grossly Exploitative Contractual Terms

In the existing legislation, the term "grossly exploitative" exists in relation to contractual clauses. This has now been deleted in favour of prohibitions. It would be better to specify "grossly exploitative" more precisely for various constellations in order to be able to deal better with individual cases and increase the security of contracts.

Monitoring and Enforcement of the Directive

Another questionable change is the proposed setting up of an authority in every country to monitor and enforce the directive. This could create an unnecessary, cost-intensive bureaucratic monster, possibly even with compulsory reporting for the companies. This point in the proposed directive should also be critically examined.

Summary and Recommendations

In total, this directive increases the volume of EU legislation even further. Terms of payment that are included in companies' general terms of business or regulated by contractual agreements should typically be settled through negotiation between the business partners. A good credit manager will take this into account when making a decision and the accountants will price the payment period into their quotations. A regulation for small and medium-sized companies that ensures that they are not exploited by the large customers and strangled in their economic development could, however, be helpful. In Germany, it is evident that in the public sector in particular, payment periods are often very long. A voluntary commitment by public contractors would therefore be a good first step that would not require any new legislation.

About the Author
Prof. Dr. Matthias Schumann

Since 1991, Prof. Dr. Matthias Schumann has held a professorship in Business Administration and Information Systems (Chair of Application Systems and E-Business) at the University of Göttingen. He also heads the joint computing center of the Faculty of Economics and the Faculty of Social Sciences. He is a shareholder of Prof. Schumann GmbH.

Prof. Schumann's research interests include information systems at financial service providers and systems for credit management, as well as issues related to knowledge and education management. Prof. Schumann has a wide range of experience in consulting companies, extensive lecturing activities and more than 350 publications.

University of Göttingen

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