New proposal for EU-regulation on combating late payment in commercial transactions – are SMEs expecting more resilience and fairness in business in future?

Briefing

The article examines the European Commission's new proposed "Regulation of the European Parliament and of the Council on combating late payment in commercial transactions"¹ on 12 September 2023. The New Proposal for EU-Late Payment-Regulation aims inter alia to combat late payments and thereby to bring fairness in commercial transactions, increase the resilience of SMEs and supply chains as well as foster a more widespread use of digitalisation.

Introduction

On 12 September 2023, the European Commission proposed the "Regulation of the European Parliament and of the Council on combating late payment in commercial transactions" (New Proposal for EU-Late Payment-Regulation) which revises the existing "Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions" (Late Payment Directive).²

The aim of the New Proposal for EU-Late Payment-Regulation is to combat late payments and thus, 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.³

Background

The reason for the New Proposal for EU-Late Payment-Regulation is that each year approximately 18 billion invoices are issued within the EU – counting to more than 500 every second. Reliable payment streams are essential to make the EU economy and particularly small and medium-sized enterprises (SMEs) more competitive. It shall be noted that goods and services are usually supplied on deferred payments which can be illustrated as follows:

Once the goods are delivered or the service agreed on in the respective contract is provided, A (ie, the supplier who is the creditor) grants B (ie, the client who is the debtor) a payment term in order to pay the invoice or the trade credit.⁴

Late payments are deemed as payments which are not made within the agreed or legal term. They have crucial impacts on companies in all sectors and all Member States of the EU as well as disproportionately affect SMEs.⁵

One of the main reasons of late payments is the existing asymmetries in bargaining power between (i) a large client (who is usually the debtor) and (ii) a smaller supplier (who is usually the creditor).

Due to the existing asymmetries in bargaining power, the creditors mostly have to accept unfair payment terms and conditions. Late payments are an attractive form of finance for debtors which costs the debtors nothing but does have a cost for creditors.⁶

This scenario is deemed to be intensified by the inadequacy of the current Late Payment Directive which seem to "lacks sufficient preventive measures and suitable deterrents, and whose enforcement and redress mechanisms are insufficient".⁷

Impact of Late Payments on SMEs and Businesses

On average, one out of two invoices in commercial transactions are paid lade or not at all in the EU. In times of crisis and economic turmoil, late payments usually increase.⁸

Late payments heavily affect SMEs as these often rely on regular and predictable streams of cash in order to be commercially active. In turn, SMEs are also paying late (or not at all) their invoices – thus, late payment creates a domino effect.⁹

70% of EU companies confirmed that being paid on time would in turn also allow them to pay their invoices on time.¹⁰

It is to highlight that, basically, a one-day reduction in payment delays would increase EU companies' aggregated cash flow by 0.9% and could save them EUR 158 million in financing costs.¹¹

Generally, late payments have the following effects for businesses:

Reduction of businesses' competitiveness;
Increase of financing costs,
Causing companies to decline attractive business or investment opportunities, for example investing in the green and digital transitions;
Increase of bankruptcy risk;
Reduction of trust and confidence in the market.¹²

These effects for businesses might result in job losses, reduces participation of SMEs in public procurement. In turn, this all can negatively affect the community due to the reduced provision of essential services like medical care, public transport or law enforcement.

This material was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in The Company Lawyer, Issue 2, 2024 and is reproduced by agreement with the publishers. For further details, please see the publishers’ website.

^{1 Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (COM(2023) 533 final) (2023/0323 (COD).}
² ^{European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).}
³ ^{European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).}
⁴ ^{Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (COM(2023) 533 final) (2023/0323 (COD).}
^{5 Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (COM(2023) 533 final) (2023/0323 (COD), p 1; European Payment Report 2022; Théo Nicolas, 'Short-term financial constraints and SMEs' investment decision: evidence from the working capital channel', (2021) 58 Small Bus Econ pages1885–1914.

6 Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (COM(2023) 533 final) (2023/0323 (COD), p 1.

7 Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (COM(2023) 533 final) (2023/0323 (COD), p 1.

8 European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).

9 European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).

10 European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).}^{11 European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).}^{12 European Commission, Q&A: Late Payment Regulation <https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4412> (30 September 2023).}

Services and Groups Corporate/M&A & capital markets