Commission’s late payments proposal misses its target

The EU’s proposed rules on late payments will deprive SMEs of the flexibility they require from their business partners, argues Alena Mastantuono.

Alena Mastantuono is a member of the European Economic and Social Committee and EESC rapporteur.

In September 2023, the Commission published the SME Relief Package, including a proposal for a Late Payment Regulation to address the shortcomings resulting from the current EU legislation. The Commission proposes to restrict/limit the payment terms in business-to-business (B2B) and government-to-business (G2B) relations at 30 days. 

According to the current rules, the period for contracts between entrepreneurs (B2B) is limited to 60 calendar days. However, the parties can agree on a longer period if the extension is not grossly unfair to the creditor. For contracts between public authorities and entrepreneurs (G2B), the period is a maximum of 30 days, unless other conditions are expressly agreed in the contract and provided it’s objectively justified by the special nature or features of the contract, and in no case may it exceed 60 days.

The culture of late payments differs considerably across sectors and member states. Two major general problems linked with late payments exist today: first, the enforcement of the current rules; and second, late payments by public authorities. 

According to the Payment Report 2023 from Intrum, the average payment term offered in B2B relations is 41 days, with an average actual payment time of 56 days. Average payment terms offered by the public sector are 52 days, with an average actual payment taking 69 days, despite a 60-day cap laid down by the current Directive. Average actual payment by the public sector is therefore 13 days longer than that of businesses, which have no cap on payment terms.

This shows that introducing a new – more severe – cap is not the optimal solution. Interfering with the freedom of contract does not seem justified here and would be disproportionate with regard to realistically expected benefits. This was also the position taken by the European Parliament. In its resolution on the state of the SME Union published in July 2023, the Parliament highlighted the importance of “addressing payment delays […] while ensuring a balanced approach that preserves the freedom of contracts” and this position should be defended by the European Parliament in its work on the Commission´s proposal on late payments.”

In our view, the proposal clearly missed the target. While public authorities and large companies are able to differentiate their portfolio of customers and suppliers, SMEs rely on a limited number of customers, financial volumes and reserves and operate mostly at the regional and local levels. 

The difference in the bargaining power among parties is just one of the reasons behind late payments: the inefficient enforceability of existing rules represents a major obstacle for creditors, which tend to not exercise their rights to preserve their business relationship with the debtor. 

Capping payment terms at 30 days will have a serious impact on SMEs. The set of proposed rules will deprive the SMEs of the flexibility they require from their business partners and would impose unnecessarily strong conditions upon them.

The lengthy and expensive nature of legal proceedings in some EU member states also discourages creditors from recovering the amount owed through the courts. For this reason, it is necessary to make better use of digital tools, to focus on financial literacy and promote other means of guarantees (i.e. bank guarantees, payment of the purchase price as a pledge or right of retention), as well as alternative ways of resolving disputes.

There is a potential benefit of introducing national enforcement bodies as proposed by the Commission. However, it must be ensured that such authorities will have to operate objectively and guarantee maximum confidentiality when treating the commercially sensitive information of both undertakings and public authorities, without imposing further obligations on reporting.

The Commission should therefore have further evaluated the possibility of amending the existing Directive and – in case of significant changes should have opted for a revised Directive (so-called recast). This would prevent all entities, regardless of size and balance of power, from being impacted. SMEs are in need of relief and the new rules should aim at providing a fairer environment for them. 

This is why the EESC underlines the importance of flexible negotiations when setting payment terms and highlights strong concerns over the Commission proposal.

The transformation of the current Directive into a Regulation might limit the flexibility of member states and of the business environment at a time of multiple headwinds across the EU. The proposal tackles the issue of long payments instead of late payments by introducing excessively restrictive measures, instead of improving the current enforcement framework with more effective rules. 

As the writer Paulo Coelho once wrote: “No one can hit their target with their eyes closed.” The Commission should take note. Before we move forward, we need further assessment of the proposed measures, their expected impact, as well as a proportional and customised approach to implementation.