Combatting late payments in commercial transactions

Payments would have to be made in 30 days, with limited exceptions

Almost 50% of the invoices in the EU are not paid on time

SMEs, which make up 99% of EU businesses, disproportionally affected by late payments

Shift in culture needed to reverse trend and discourage late payments

The proposed rules aim to protect companies, particularly SMEs, against those who pay late and ensure timely receipt of payments to avoid cash flow disruptions.

On Tuesday, Parliament adopted its position on revised rules to tackle late payments and boost the competitiveness of companies, particularly the smaller ones. The draft regulation introduces a series of measures to eliminate ambiguities and legal gaps that have limited the effectiveness of the current directive.

Improving the payment culture and freedom of contract

To help standardise and improve payment discipline of companies and authorities, the draft text puts in place a stricter maximum payment deadlines of 30 days in both business- to-business (B2B) and government-to-business (G2B) transactions (where the public authority is the debtor). However, in order to ensure more flexibility to negotiate payment terms, MEPs adopted provisions for a 60-calendar day deadline in B2B transactions, when it is expressly agreed in the contract.

Recognising that the specific business models and practices in the retail sector often require longer payment periods due to factors like low product turnover, seasonality or unique cycles for items (e.g. toys, jewellery, sporting equipment), MEPs propose allowing for payment terms of up to 120 days in these cases. In addition, the rules would not apply to payments contributing to the distribution and manufacture of books or their “printing, binding or publishing”, where the payments terms will be defined by agreements between the concerned parties.

Compensation fees

The proposal puts in place an automatic payment of accrued interest and compensation fees for late payments. MEPs agreed that the debtor would owe between 50 and 150 euro for each transaction (depending on the value) to compensate for the creditor’s own recovery costs.

Strengthening redress mechanisms

The text introduces new enforcement, redress and awareness-raising measures. It also encourages the use of e-tools to help shorten delays and financial literacy trainings for SMEs. Once a year, contracting authorities (e.g. government entities) would have to submit publicly accessible reports on their payment practices to the national enforcement authority. A European Observatory of Late Payment would also be set up to monitor, collect and share data on late payments and potential harmful practices.

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Rapporteur Róża Thun Und Hohenstein (Renew, PL) said “Unreliable cash flows can jeopardize SMEs and micro-enterprises, limiting growth, innovation and EU’s competitiveness. With this regulation, we are not only protecting the smaller companies, which are the backbone of our economy, but above all, we introduce predictability and fairness for all European companies. It is a major push towards fostering a better payment culture, beneficial for the entire European economy”.

Next steps

The report, which was adopted with 459 votes in favour, 96 against and 54 abstentions, will constitute Parliament’s position at first reading. The file will be followed up by the new Parliament after the European elections on 6-9 June.

Background

Late payments (made outside the agreed or legal term) affect all member states and business sectors, especially SMEs. One of the principal causes of late payments is the imbalance in bargaining power between a large or more powerful client (debtor) and a smaller supplier (creditor), forcing the latter to accept unfair payment terms. They lead to an increased risk to bankruptcy, uncertainty in business planning and budgeting, and reduced participation in public procurement.

The revision of the Late Payment Directive seeks to improve payment discipline among all parties and protect companies from the adverse impacts of payment delays. This initiative is part of a broader effort to bolster Europe's SMEs, which make up 99% of all businesses and account for two-thirds of private sector jobs.