Late payments in commercial transactions are a big issue, especially for SMEs. The European Commission is stepping in with new rules to tackle the problem. They’re upping their game, too – from Directive to Regulation! This overhaul aims to make transactions fairer, improve financial literacy, and support digital solutions. Here’s our summary of the EC’s fresh Q&A on late payments.
Update 09/04/2024: Read the EU parliaments Late Payment Regulation schedule here.
Why new rules on late payments?
The EC aims to fight late payments that hurt SMEs the most. One in four bankruptcies happen because of unpaid invoices. The new Regulation replaces 2011 Directive on combating late payments in commercial transactions to promote fairness and resilience in SMEs. It also encourages digitalisation and better financial literacy.
How do late payments affect businesses?
Half of all invoices in the EU are paid late, making SMEs vulnerable. Late payments lead to a knock-on effect, hindering companies from paying their own bills. This hurts business competitiveness and increases bankruptcy risks. The EC points out that a one-day reduction in delays saves companies €158 million. Not to mention damaging what B2B thrives on – trust relationships!
Why revise the current Directive?
After 12 years of the Late Payments Directive, the existing laws just aren’t enough. They lack preventive measures and effective redress mechanisms. The EC aims to fill these gaps with this new Late Payments Regulation.
What’s new in the proposal?
This proposal replaces the current Directive with a Regulation for better EU-wide applicability (types of EU legislation). It sets maximum payment terms. It also makes interest and compensation fees automatic. However, member states will get some flexibility in three areas: enforcement (setting up bodies), Alternative Dispute Resolution (ADR) procedures, and training (digital financial literacy and credit management).
How are legal payment terms changing?
The new Regulation sets a 30-day payment term cap for all commercial transactions, including B2B. This eliminates the vague “grossly unfair” concept from the Directive. Background: although the Directive indicates a limit of 30 days extendable to 60 days, in practice up to 120 days was common, according to the EC. Verification procedures are also capped at 30 days.
What about interest and fees?
Interest for late payment becomes automatic: +8% above the ECB reference rates. The creditor won’t be able to waive this right, nor will it have the burden of imposing it. The flat fee compensation for a late payment will be raised from 40 EUR to 50 EUR.
How will rules be enforced?
Member States will establish authorities to monitor, investigate, and sanction late payers. The Regulation also suggests voluntary use of Alternative Dispute Resolution (ADR) mechanisms for quicker resolutions.
Who benefits?
The EC thinks SMEs stand to gain the most. On-time payments improve cash flow by 0.9% per day the payment duration reduces. The big win is marketplace trust. Additionally, what will companies save when payments come in on time across the EU?
- €9 billion per year
- 340.2 man hours per year
- €27 million by using ADRs instead of court cases
Any new burdens?
No new reporting requirements for businesses or public authorities. However, one-off costs like invoice updates could be around €243 million across the EU. Public authorities would have some cost setting up new authorities that the Regulation calls for.
Upskilling opportunties?
Member States will offer credit management and financial training for SMEs. This will help them understand and navigate payment terms better.
Impact on international competitiveness?
Late payments are a global issue. Other countries already have similar laws, so the EC envisions that there are no major risks of companies bypassing EU rules by using their local laws as a fallback.
When will it apply?
First the European Parliament and European Council have to adopt the new Late Payments Regulation. Then, it takes effect one year after being adopted. This gives time for businesses to adapt (although one year might not be enough!). Transactions after this date will follow the new rules, regardless of when contracts were signed. This deters rushing into contracts with the current rules.
How will monitoring take place – and who?
A EC report will come out four years after implementation. The EU Payment Observatory (created in 2022) will become the focal point for collecting and sharing data on payment performance.
As you can see, the new Regulation aims to make commercial transactions more fair and predictable, especially for SMEs.
One thing we can certainly predict is that this won’t be the last change in payments regulation. That will most certainly continue to evolve based on observations once the new Regulation goes into effect.
How does this relate to Terms.Tech?
Terms.Tech is a Belgium-based European delayed payment terms service. We help business customers improve cash flow and grow sales. How? We deliver Buy Now, Pay Later services for any B2B need, and pay sellers upfront upon proof of delivery.
Furthermore, we tick the boxes our customers say are important to them:
- One-click checkout? Yes.
- Custom solutions for complex B2B platforms? You betcha!
- Amazing REST API and webhooks to get you going?
- Human and friendly customer-driven approach? Absolutely!
- Customisable approach via white label option? You know it!
By efficiently providing instant payment terms decisions, debt collection, and a white label option, Terms.Tech is an unmatched B2B payments specialist. Even more, Terms.Tech has coverage across the EEA and Switzerland, making Terms.Tech the go-to choice for European businesses looking for an easy-to-integrate and customer-friendly BNPL solution.
We’d love to discuss our B2B payment terms solution with you and how we can help your operation, especially to avoid issues around late payments. Get in touch!
