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Subject: Commission Staff Working Document accompanying document to the Proposal for a Directive of the European Parliament and of the Council on combating late payment in commercial transactions (recast) Impact Assessment Delegations will find attached Commission document SEC(2009) 315 .
________________________
Encl.: SEC(2009) 315
COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, 8.4.2009 SEC(2009) 315
COMMISSION STAFF WORKING DOCUMENT
Accompanying document to the
Proposal for a
DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL
on combating late payment in commercial transactions (recast)
Impact assessment
{SEC(2009 316}
TABLE OF CONTENTS
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1.Procedural issues and consultation of interested parties .............................................. 5
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2.Problem definition ........................................................................................................ 5 2.1. The problem and its size............................................................................................... 5 2.2. The causes of the problem ............................................................................................ 9
2.2.1. The market structure..................................................................................................... 9
2.2.2. The business cycle, ..................................................................................................... 10 2.2.3. Access to finance and budgetary constraints.............................................................. 10 2.2.4. The internal organisation of creditors and debtors, .................................................... 11 2.2.5. The absence of effective and efficient remedies ........................................................ 12
2.3. The effects of the problem.......................................................................................... 13 2.3.1. Late payment represents a significant cost to creditor enterprises ............................. 13 2.3.2. Debtor companies and public authorities paying late get free trade credit ................ 15
2.3.3. Late payments have a negative impact on intra-community trade. ............................ 15
2.4. How is the problem likely to develop?....................................................................... 17
2.5. Legal basis .................................................................................................................. 17 3. Objectives ................................................................................................................... 18 3.1. General objectives ...................................................................................................... 18 3.2. Specific objectives...................................................................................................... 19 3.3. Operational objectives ................................................................................................ 19
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4.Policy options ............................................................................................................. 19 4.1. Overview of policy options - Subsidiarity and proportionality.................................. 19
4.2. Baseline option: no policy change.............................................................................. 21
4.3. Non-legislative options............................................................................................... 21 4.3.1. Option 2a: The organisation of awareness raising activities targeted at businesses .. 21
4.3.2. Option 2b: The organisation of awareness-raising activities targeted at organisations representing SMEs...................................................................................................... 22 4.3.3. Option 2c: Publication of information on bad debtors ............................................... 22
4.4. Legislative options...................................................................................................... 22 4.4.1. Option 3a: Full harmonisation of payment periods .................................................... 22
4.4.2. Option 3b: increasing the "margin" interest rate ........................................................ 22 4.4.3. Option 3c: the abolition of the threshold of 5........................................................... 23 4.4.4. Option 3d: the introduction of a "Late Payment Fee" ................................................ 23 4.4.5. Option 3e: the introduction of a "Late Payment Compensation"............................... 23
4.4.6. Option 3f: Strengthen the role of representative organisations .................................. 23
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5.Analysis of impacts .................................................................................................... 24 5.1. Option 1: baseline option............................................................................................ 25
5.2. Option 2a (non-legislative): The organisation of awareness raising activities targeted at businesses ............................................................................................................... 25 5.3. Option 2b (non-legislative): The organisation of awareness raising activities targeted at organisations representing SMEs ........................................................................... 26 5.4. Option 2c (non-legislative): Publication of information on bad debtors.................... 26
5.5. Option 3a (legislative): Harmonisation of payment periods ...................................... 29 5.5.1. Option 3a/1: The harmonisation of payment periods between economic operators .. 29
5.5.2. Option 3a/2: the harmonisation of the periods for payment by national authorities to economic operators..................................................................................................... 33 5.6. Option 3b (legislative): increasing the "margin" interest rate.................................... 35
5.7. Option 3c (legislative): the abolition of the threshold................................................ 36 5.8. Option 3d (legislative): the introduction of a "Late Payment Fee"............................ 37 5.9. Option 3e (legislative): the introduction of a "Late Payment Compensation"........... 39
5.10. Option 3f (legislative): Extending the role of representing organisations ................. 39
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6.Comparing the options ............................................................................................... 40
6.1. General comparison.................................................................................................... 40
6.2. Ranking the options.................................................................................................... 43
6.3. Administrative cost..................................................................................................... 44 7. Monitoring and evaluation ......................................................................................... 44
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8.Annexes ...................................................................................................................... 45 8.1. Annex 1: Results of the I.P.M. consultation of interested parties .............................. 45 8.2. Annex 2: Results of the EBTP consultation of interested parties .............................. 52 8.3. Annex 3: The causes and the size of the problem: facts and figures.......................... 58
8.4. Annex 4: Detailed description of the baseline option ................................................ 84
8.5. Annex 5: Options discarded at an early stage ............................................................ 86
8.6. Annex 6: overview of the jurisprudence of the Court of Justice about the Directive 95
8.7. Annex 7: Transposition of Article 3(5) (organizations representing SMEs) and Article 6(3)(c) (threshold of 5) ................................................................................. 97 8.8. Annex 8: the SME test................................................................................................ 98
Lead DG: ENTR. Other services invited to participate: SG, SJ, COMP, BUDG, SANCO, TAXUD, ECFIN, MARKT and JLS. The Impact Assessment Board delivered its opinion on 17 December 2008 [D(2008)10479]. All recommendations made by the Board were taken into account and this document was amended accordingly. Agenda planning or WP reference: 2009/ENTR/006. This report commits only the Commission's services involved in its preparation and does not prejudge the final form of any decision to be taken by the Commission.
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1.P ROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES
An inter-service steering group was established, in which ENTR, ECFIN, MARKT and JLS participated. SG, SJ, COMP, BUDG, SANCO and TAXUD declined. The steering group met on 17 April, 19 May, 11 September and 14 November 2008.
1
Stakeholders were consulted through a public consultation through I.P.M. (Your 2
Voice in Europe ) in accordance with the Commission's minimum standards on 3
public consultation. In addition, the EBTP (European Business Test Panel) was also
consulted. The results of these consultations are incorporated in this impact assessment. This impact assessment also draws on external expertise
4
and different
publications mentioned in the footnotes throughout the text.
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2.P ROBLEM DEFINITION
2.1. The problem and its size
In the EU, most goods and services are supplied by businesses to other businesses and to public authorities on a deferred payment basis whereby the supplier gives its client time to pay ("trade credit"). This time period is agreed between parties, or set out in the supplier's invoice or laid down by law. At the latest at the end of the trade credit period, the supplier expects payment for the goods or services delivered. Payment made after the trade credit period constitutes late payment.
When a business delivers products or services to other businesses or to public authorities (hereinafter "commercial transactions"), each transaction can represent a significant share of the turnover of the economic operator concerned. Therefore, most businesses expect payment for commercial transactions within a reasonable time so that they can pay their own debts and invest in future activities and assets. The deadline for payment in commercial transactions is either specifically agreed upon or laid down in the general commercial conditions of the economic operator delivering the products or the services.
1 http://ec.europa.eu/yourvoice/ipm/forms/dispatch?form=Latepayment&lang=en . See Annex 1. 2 http://ec.europa.eu/yourvoice/index_en.htm .
3 http://ec.europa.eu/yourvoice/ebtp/index_en.htm . See Annex 2. 4
Study on the effectiveness of Directive 2000/35/EC (2006), hereinafter the "Hoche report" (
http://ec.europa.eu/enterprise/regulation/late_payments/further_reading.htm ) and a study by RPA Ltd. (2008), herinafter the "RPA Report".
However, many payments in commercial transactions between businesses or between businesses and public authorities are made later than agreed or laid down in the general commercial conditions (hereinafter "late payment"
5
). Although the
goods are correctly delivered or the services well performed, the corresponding invoices remain unpaid or are paid well after the deadline. These practices impinge on liquid assets and complicate the financial management of enterprises. They can also affect their competitiveness and profitability when the creditor needs to obtain external financing because of late payments. They also have a negative effect on intra-Community commercial transactions, as will be explained below.
Directive 2000/35/EC was adopted to combat late payment in commercial transactions between businesses or between businesses and public authorities
6
.
According to the Directive, statutory interest may be charged when payment is not made within the contractual or legal deadline. It becomes payable from the day following the date, or the end of the period, for payment fixed in the contract, or 30 days following the date of receipt by the debtor of the invoice or an equivalent request for payment. The general rule is that the level of interest for late payment ("the statutory rate"), which the debtor is obliged to pay, should be the sum of the interest rate applied by the European Central Bank to its most recent main refinancing operation carried out before the first calendar day of the half-year in question ("the reference rate")
7
, plus at least seven percentage points ("the margin"),
unless otherwise specified in the contract:
Table 1.1: Interest rates for late payments in the EU (1 January 2009)
Eurozone
Reference rate (currently the ECB rate is 2.5% plus the margin of at least 7 percentage points in all Member States of the Eurozone 9.5% Exceptions: Reference rate plus margin of at least 8 percentage points: Germany, Austria, Slovenia 10.5% Not Eurozone
Reference rate ( ational Bank rate) plus margin of at least 7 percentage points: Bulgaria
12.17%
Czech Republic 9.25% Denmark 10.5% Estonia 9.5% Latvia 13%
Lithuania 15.21%
5 According to Article 2(2) of Directive 2000/35/EC on combating late payment in commercial transactions, late payment means "exceeding the contractual or statutory period of payment". The Court of Justice confirmed in this respect that, pursuant to Article 3(1)(a) of the Directive, the parties are generally free to fix in their contract the date or the period for payment (judgement of 11 December 2008, Commission v. Spain, Case C-380/06). 6
The Directive defines commercial transactions as "transactions between undertakings or between undertakings and public authorities which lead to the delivery of goods or the provision of services for remuneration." The directive applies to more than 23 million undertakings in the EU. It is estimated that there are around 15 billion commercial transactions per year in the EU. 7
In practice, the ECB rates are published at the beginning of every January and July in the Official Journal, series C. The reference rate in force on the first calendar day of the half-year in question shall apply for the following six months. See http://www.ecb.eu/stats/monetary/rates/html/index.en.html . For
a Member State which is not participating in the third stage of economic and monetary union, the reference rate referred to above is the equivalent rate set by its national central bank. For the purposes of the Directive, the reference rate in force on the first calendar day of the half-year in question applies, in both cases, for the following six months.
Hungary 17%
Poland 12.25%
Rumania 17.25%
Exceptions: reference rate ( ational Bank rate) plus margin of at least 8 percentage points: United Kingdom
10%
Sweden 10%
The Directive mainly addresses the situation where the commercial debt is eventually paid after the contractual or legal deadline but without any judicial proceedings. Yet, when judicial proceedings are necessary for obtaining payment of the commercial debt, the Directive obliges Member States to ensure that an enforceable title can be obtained, irrespective of the amount of the debt, normally within 90 calendar days of the lodging of the creditor's action or application at the court or other competent authority, provided that neither the debt nor other aspects of the procedure are disputed.
Despite this Directive, late payments in commercial transactions are still a widespread practice in the EU:
Table 1.2: Evolution of late payments for SMEs in 7 EU Member States
(average actual delays in number of days)
2003 2004 2005 2006 2007 Germany 12 13 19 13 15 Belgium 23 16 20 19 17 Spain 10 9 13 18 12
Italy 19 16 27 21 21
Portugal 45 35 38 38 38 U.K. 18 10 18 15 13 8
Source : Eurofactor, Baromètres 2006, 2007 and 2008 9
There is overwhelming evidence that late payment in commercial transactions is still
a general problem within the EU. For example: a study in 10 Member States indicates that 98% of all economic operators experience late payment
10
. Belgian
11
surveys show that 31% to 49% of responding enterprises experience problems with
8 More detailed figures are shown in Annex 3.
9 Besides the sources quoted in other footnotes, other information about payment delays can be found, for example,
on http://www.payontime.co.uk/news/news_main.html , http://www.ivkm.be/ , http://www.finances.gouv.fr/directions_services/cedef/synthese/delais-paiement/synthese.htm ,
http://www.crion.com/cms_files/N-77-nlBestand.pdf , http://www.iec- iab.be/ned/publicaties_info_economie.aspx?id=1847 , http://www.fd.nl/artikel/9669604/top10-
betalingsexcuses , http://managementscope.nl/nieuws/2028-credit-managers-kredietwaardigheid/2028-
credit-managers-kredietwaardigheid , http://www.cfo-news.com/ESPANA-%7C-En-Espana-la-Ley- contra-la-morosidad-no-es-suficiente_a337.html , http://www.cmrc.co.uk/surveys/debt_survey/ , https://www.financialworld.co.uk/Archive/2008/2008_06jun/Features/late_payments/14414.cfm , http://www.startups.co.uk/6678842910891084831/late-payments-rise-to-8-3bn.html ,
, http://press.experian.com/documents/showdoc.cfm , http://eos- ksi.cz/fileadmin/user_upload/Eastern_Europa/EOS_KSI_CZ/EOS_Payment_Practices.pdf ,
and many other sites.
10 Study on Credit Management Practice in 10 European Economies, commissioned by Euler Hermes, 2006. 11
Survey organised by UNIZO, "Dossier Betalingsachterstanden: UNIZO-Actieplan tegen slechte betalers",
24 March 2005; Survey organised by NSZ in 2008: http://www.nsz.be/index.cfm?PageID=18119&News_ID=18538&style=66 .
late payments, with an average payment delay of 28 days. For 81% of respondents, late payment is an important problem. Another source points out that average payment delays throughout Europe increased from 16 days in 2007 to 17 days in 2008
12 13
. According to a recent survey , over 30% of turnover is paid late to around
44% of the larger companies. The situation is worse for smaller enterprises: 59% of them are paid late for more than 30% of their turnover. A further 27% of large companies indicated that between 20% - 30% of turnover is paid late, with the corresponding figure for smaller companies being around 14%. In the UK, 48% of all SME employers consulted reported late payment as a problem with one in six describing it as a major problem (up from 12% in 2005)
14
. The Survey organised for
the RPA Report shows the following results:
Table 1.3: Percentage of turnover paid late
Percentage No
<1% 1-5% 5-10% 10-20% 20-30% >30% turnover response
>250 staff 4.8% 15.9% 9.5% 6.3% 23.8% 38.1% 1.6% <250 staff 1.3% 10.1% 8.8% 8.2% 14.5% 56.6% 0.6%
Stakeholder Consultations point in the same direction: 53% of the EBTP respondents frequently encounter late payment in B2B transactions while 32% frequently encounter late payment by public authorities. More than 65% of the businesses responding in the IPM consultation frequently encounter late payment in B2B transactions while 61% frequently encounter late payment by public authorities.
Surveys also show that, in general, late payment occurs frequently in the public sector. According to a recent report, public authorities sustained their position as the worst payers in the EU, taking an average of 65 days to pay an invoice, compared to 55 days for businesses
15
. The RPA on-line survey with regard to amounts owed by
16
the public/private sector indicates that around 30% of the SMEs responding stated
that 90% or more of their late payments are owed to them by the public sector, with another 30% indicating that a similar percentage is owed to them by the private sector. Only 12.7% of larger companies attribute 90% or more of their late payments to the public sector, while around 32% attribute 90% or more of late payments to private sector clients. When asked about the sectors that have most difficulty paying within 30 days, 31% of all companies responding to the on-line survey highlighted the public sector. Other surveys confirm these findings. In Belgium, for example, only 13% of respondents experienced payment within 90 days
17
. In Italy, a survey
points out that payment delays for public administrations increased from 138 days in 2008 to 170 days nowadays. 50% of enterprises supplying to public administrations
12 Intrum Justitia, European Payment Index 2008. 13
Survey organised for the RPA report.
14 BERR, Department for Business, Enterprise & Regulatory Reform, The Annual Survey of Small Businesses' Opinions 2006/07 (ASBS 2006/07), URN 07/389. 15 Intrum Justitia, European Payment Index 2008: White paper Industries and credit management best practices, September 2008. 16 See Table 3.11 in Annex 3. 17 http://www.sninet.be/.
suffer payment delays averaging 2-4 months. For 25%, it takes about 4 to 6 months to get paid
18
.
2.2. The causes of the problem
The roots of late payments in commercial transactions and the corresponding passive attitude of many creditors are diverse and interrelated
19
:
2.2.1. The market structure
The level of competition within a market, the market power of market participants and the corresponding fear of harming commercial relationships with clients are important factors determining whether creditors accept or refuse late payment and whether debtors seek an extension of the period of trade credit. The position of a creditor in a specific market will have a large impact on his attitude vis-à-vis late payment and on his fear of damaging his commercial relationship with the client which is the most important reason for EBTP respondents and IPM respondents not to claim interest for late payment:
20
Table 1.4: Why do IPM and EBTP respondents never claim interest? (Multiple replies possible)
IPM EBTP
Out of fear that the customer would be lost 58.3% 68.5% It is too complicated to claim interest 47.9% 45.9%
Competitors never claim interest for late payments 37.5% 28.8%
Late interest is considered as revenue, even when it is paid 4.9% 13.5%
Unawareness about the right to charge interest for late payment 11.8% 13.5% The interest rate is unknown 7.6% 7.2% Don't know 3.5% 5.4%
Some businesses do not react to late payment since the tacit extension of the trade credit they thereby grant to the customer is an element of their marketing strategy and a potential source of competitive advantage for generating sales and customer loyalty. The acceptance of late payment by suppliers can also respond to the customer's needs or demand for short-term finance, or can signal the financial solidity or the commercial reputation of a business, and even indirectly the quality of the product or service. Nevertheless, many suppliers will take into account the competitive structure of the markets in which they operate, the bargaining strengths of both parties and the conditions affecting the supply of alternative sources of corporate finance
21
.
For debtors, the main reasons for timely payment in commercial transactions are often related to commercial or professional repute or mutual trust in long-term commercial relationships. In other circumstances, the debtor is in a strong position up to the moment of payment. After the delivery of the goods or services, the power
18 http://www.varesenotizie.it/varese-economics.html. 19 See Table 3.1 in Annex 3. 20
See Annex 3.
21 Wilson N., "An Investigation into Payment Trends and Behaviour in the UK: 1997-2007", Department for Business, Enterprise & Regulatory Reform and CMRC, 2008.
in short-term or one-off commercial relationships automatically shifts to the debtor until the date of payment.
Furthermore, many debtors know that they are unlikely to be sanctioned for paying late. This feeling of impunity derives from several factors, notably the awareness that most creditors are hesitant to take action to preserve their commercial relationships, the slowness and prohibitive cost of legal procedures to claim payment and the corresponding interest and, for some debtors, the non-deterrent rate of the statutory interest. Debtors' insouciance also has its roots in a very competitive supply chain whereby customers can pick and choose their suppliers among many competitors, or in a market with imperfect competition.
In addition to the problem of late payment, stakeholders also often argue that they are forced to stretch the contractual payment period or to accept unreasonable payment conditions. During contract negotiations for commercial transactions or during the public procurement process, parties do not necessarily have equal negotiation power. In particular, SMEs often find themselves in a weak position when negotiating contracts with larger entities and have to consent to very long payment periods to strike the deal. In some cases, they could be forced to sign a contract that expressly excludes the payment of interest in case of late payment. In most Member States, contract law does not set standardised and legally enforceable payment periods protecting SMEs from contractual clauses stipulating very long payment periods. This is compounded by the fact that SMEs normally have insufficient expertise in contract negotiations and/or insufficient time to negotiate contracts.
2.2.2. The business cycle,
Changing macroeconomic conditions are another cause of late payment. A business cycle downturn is likely to cause more late payments as firms delay paying their invoices to stretch their liquidity. Also, firms suffer from a a reduced ability to generate income from their operations because of receding demand, and banks tighten credit conditions possibly reducing credit volume to firms.
However, improvement in economic conditions may also provoke an increase in late payment for certain firms presented with more investment opportunities and, consequently a greater need to obtain a sufficient amount of financing.
2.2.3. Access to finance and budgetary constraints
Monetary policy, the availability of credit, the flow and nature of credit information, the liquidity position of the firm and the availability of financial resources from banks may also affect payment behaviour, particularly for businesses for which bank credit is a substitute for supplier financing.
Many debtor enterprises and public authorities consider late payment an efficient and cheap way to finance their own businesses and activities. For public authorities, late
payments to creditors are an efficient way to overcome budgetary constraints by postponing payments to the next budgetary period
22
.
2.2.4. The internal organisation of creditors and debtors,
The financial management practice of debtors (including public authorities) and the credit management practice of creditors as well as their product and service quality and after-sales service are important factors in (avoiding) late payment. Creditors in commercial transactions, and especially SMEs, do not necessarily have appropriate credit management systems for preventing or managing late payments:
Table 1.5: Payment Surveillance Practices
d i s
e n r e i c h n
h a a
h e i c e s
) w o
g ) g t e d t e d v t i m
l l l y a a l e
a i n l y a i n r e s b t h m m
u u t i f i e s w i c e s a s i n n e n i l a e r
n n t o o t o d
a e c k e e k a e c k o e a u s t e m e n v u s t e m t h u r e p v
M c h ( w M c h ( m A s y i d i n d A s y p s e n Wh a O >250 staff 3.2% 1.6% 61.9% 6.3% 0.0% 27.0%
<250 staff 10.7% 9.4% 45.3% 6.9% 1.9% 25.8% Source: survey organised for the RPA Report
For more than 45% of EBTP and IPM respondents, it is too complicated to claim interest when late payment occurs. Smaller enterprises usually have insufficient resources to take action against the debtor. Some of them do not know how to calculate late payment interest while others lack the means to enforce payment. It is arguable that smaller firms are less able than large firms to insist on prompt payment. This, in turn, may be because SMEs feel more pressure, despite the cost of extending trade credit on a net basis, to offer this financial service just to stay in business
23
.
More than 28% of the EBTP respondents and 37.5% of IPM respondents never claim interest because their competitors never do.
22 According to the IMF, payment delays by public authorities often arise from attempts to slow down the recording of expenditures at the final stages of the spending process. Faced with a monthly or quarterly financing constraint, public authorities are often tempted to slow down the payment process by delaying the issue of payment orders in order to meet financing ceilings. In accrual accounting terms, once goods or services are verified as delivered, the government has incurred a liability; only in cash accounting terms do such practices have any purpose (albeit misguided). If the above practices are relied on for a prolonged period, the authorities' liabilities (and hence expenditure levels) are not correctly reflected in the bank accounts, owing to the existence of unpaid overdue bills, which represent expenditure arrears. Therefore, the IMF advises ministries of finance to carefully compare their reports on bills received and payment orders issued with those on payment orders encashed, as recorded by the central bank or government payment agency. The IMF suggests several causes for late payments by public authorities. For example, the budget provision is unrealistic and line ministries are allowed to commit expenditure within that appropriation (i.e., budget provision), even though there is no cash available to liquidate the expenditure. Or the budget figures may be realistic, but the cash plan (and monthly cash limits) associated with the budget are not, or there is no in-year guidance on when expenditures can be committed. Commitments may not be recorded and therefore do not respect the budget ceilings or the timetable defined by the cash plan. Finally, the public authorities may not be efficiently organised. Source: http://www.imf.org/external/pubs/ft/expend/guide4.htm#probexe. 23
Wagenvoort R., "Are finance constraints hindering the growth of SMEs in Europe?", in: Europe's changing financial landscape: The financing of small and medium-sized enterprises, EIB Papers Volume 08. n°2/2003.
2.2.5. The absence of effective and efficient remedies
Despite Directive 2000/35/EC, many businesses, and in particular SMEs, do not charge interest when entitled to do so, thus contributing to the situation in which debtors are not sanctioned for paying late
24
. 75% of EBTP respondents seldom or
never claim interest for late payments. According to the responses from a specific questionnaire on claims for late payment interest, the average claim rate for SMEs is 13.5% of all late payments and the equivalent rate for large companies is 18.24%. According to a consultation organised in France, 90% of participating organizations think that less than 10% of their members put into practice the statutory interest provided for by law. Other sources confirm these figures:
Table 1.6: companies claiming interest for late payments in 7 EU Member States
2005 2006 2007
Germany 54% 47% 52% Belgium 39% 36% 34% Spain 25% 22% 14%
France 11% 15% 12% Italy 25% 21% 21%
Portugal 22% 20% 26%
United Kingdom 11% 13% 22% Source : Eurofactor, Baromètres 2006, 2007 and 2008
For some creditors, the cost of taking action against late payment is not justified by the financial benefits. In many cases, the expenses of the extra-paperwork cannot be recovered. Chasing late paying clients or charging interest for late payments generates administrative costs that many businesses wish to avoid. For about 66% of EBTP and IPM respondents, the loss of management time and working hours is the most important effect of late payment. Furthermore, the final amount of the statutory interest due from a debtor can only be calculated on the day that the creditor is actually paid so the latter must await payment before he can know exactly the amount of interest that he could charge. In addition, the costs of charging interests before the actual date of payment would outweigh the financial benefits in most cases.
In addition, several key provisions of the Directive are unclear or difficult to implement in practice
25
. For instance, diverse interpretations are conceivable for the
calculation of the applicable interest rate, the definition of "relevant recovery costs" and the possibility of compound interest. Moreover, the Directive specifies that Member States may exclude claims for interest of less than 5
26
.Thus, the
Directive implies in practice that the creditor will have to wait until the interest reaches 5 before effectively charging it. This additional delay obviously depends on the interest rate and the amount owed. For example, a creditor can only claim interest for a late payment of 1,000 after 17 days following the payment deadline (based on a reference rate of 11%).
24 Etude sur les délais de paiement", by Prof. Michel Glais, 2005. See Tables 3.8 and 3.9 in Annex 3. 25
Although the Directive is fairly recent, already 5 cases with divergent interpretations of the Directive were submitted to the Court of Justice. An overview of this jurisprudence is shown in Annex 6. 26 See Annex 7.
2.3. The effects of the problem 2.3.1. Late payment represents a significant cost to creditor enterprises
In general, late payment strains cash flow, adds financial and administrative costs, squeezes investment opportunities and fuels uncertainty for many creditor businesses and in particular, SMEs
27
, especially in an economic downswing with limited and
expensive access to finance.
The result is often that their competitiveness and solvency, and eventually their viability are compromised
28
. Based on the responses to a survey and on a number of
29
assumptions , the value of turnover paid late accounts for around 1,864 billion across the EU:
Table 1.7: Value of annual turnover (bn) paid late 30 EU bn
Large company turnover paid late 724 SME turnover paid late 1,141 TOTAL 1,864
It should be noted that SME's are particularly vulnerable to late payments:
(1) SMEs are more exposed to variations in cash flow: the financial costs of late payment for SMEs are particularly high 31
, with cash-flow needs having to
be met by short-term bank loans or overdrafts. Micro and small companies' lower turnover and limited access to finance often result in more expensive credit
32
.
27 OECD SME, 2002. In Successes and Challenges for SMEs, 2003, the SME Union observes that payment delays caused by big companies are twice as frequent as those caused by SMEs. A survey in the UK (Mamut survey, published November 2006) showed that 56% of the SMEs with less than 20 employees have debtors who are late payers versus only 29% of those with 20-50 employees. See also Bulletin de la Banque de France, n. 168, décembre 2007, p. 82-84. 28 Pike R., Cheng N.S., Cravens K. and Lamminmaki D.: "Trade Credit Terms: Asymmetric Information and Price Discrimination Evidence From Three Continents"; Journal of Business Finance & Accounting, 32(5) & (6), June/July 2005, p. 1201. 29
This turnover could be linked to any delay, i.e. from one day's delay to 60 days' delay or more. This figure has been calculated by combining the average percentage of turnover paid late with data on average company turnover by size from Eurostat. Yet, since this figure is based on people responding to the RPA questionnaire, it may overestimate the turnover paid late reflecting respondents' bias towards the subject.
30 Applies average percentage paid late to average company turnover by size, as given in EUROSTAT, but assumes the mid-value for percentage of turnover paid late, i.e. 3%, 7.5%, 15%, 25% and 30% for the last category of percentage turnover paid late. B2B turnover has been calculated assuming that the % of company turnover from B2B transactions is 42% of the overall turnover. This assumption is made on the basis that consumer spending represents approximately 58% of EU GDP. See Table 3.7 in Annex 3 for further details. 31 In France for instance, it has been calculated that, for 50% of the SMEs, late payments amount to a charge in their cash-flow equivalent of more than 20 days of business. Source: « Délais de paiement et solde du crédit interentreprises de 1990 à 2006 », in Bulletin de la Banque de France, n. 168, décembre 2007, p. 81. 32 See, for example, Petersen M. and Rajan R.G., "Trade Credit: Theories and Evidence" (1996-06-01), NBER Working Paper No. W5602, http://ssrn.com/abstract=225540 ; Wilson N, Summers B., "Trade
Credit terms offered by Small Firms: Survey Evidence and Empirical Analysis", Journal of Business Finance & Accounting, 2002, Vol. 29 (3&4), p. 317; Pike R. and Sang Cheng N., "Credit Management:
(2) SMEs often rely on a limited number of clients: the vulnerability of SMEs is accentuated by their narrow client spread and the resulting overreliance on specific client activity to maintain revenue streams 33
. SMEs are often reliant
on only a handful of clients for a large proportion of turnover and this in turn leads to clients abusing their position by imposing very long payment periods in contracts and/or paying late.
(3) The administrative costs of pursuing debts are disproportionately high for SMEs, as they typically have neither specialized staff nor enough time to properly manage outstanding claims. For example, an average SME in Great Britain spends 2.5 hours a week chasing late payments 34
.
Table 1.8: Impact of late payments on enterprises: some examples
The Hoche report shows that for 8% of respondents, late payments impact directly and significantly on their survival chances while another 49% of respondents considered that late payments have an impact on their survival chances. A study in 10 Member States points out that 76% of all economic operators' cash flow has been affected by late payment
35 .
Another survey 36 showed that the profitability of 39% of British firms had been hit by late payment.
A third (30% of British companies had been unable to pay their own bills on time as a result of late payment which had also forced almost one in five companies (18% to delay the expansion of their business . Other research
37 showed that almost a fifth of SMEs (19% now employ a dedicated person to chase
up late payments losing an average of 17 working days a year to this task . For 31% of EBTP respondents, late payment slows down the growth of their business and for 28%, it affects their productivity. Late payment has a negative effect on investment for 22% of EBTP respondents and for 13% of them, it threatens the survival of their business. Late payment does not affect the business of 18% of EBTP respondents. Managing cash flow is still perceived as an obstacle to success by almost half of SME employers, according to a survey. Over half of the respondents who reported cash flow to be an obstacle cited late payment as being a key concern. 56% cited late payment from businesses. Possibly because of the size of unpaid invoices, late payment by businesses was more commonly cited as the biggest challenge in cash flow terms (30 per cent, compared to 13 per cent citing late payment from individuals)
38
.
From a macroeconomic perspective, late payment has a detrimental effect where it requires economic operators to take out loans at a higher interest rate than the late paying customers.
An examination of Policy Choices, Practices and Late Payment in UK Companies", Journal of Business Finance & Accounting, 2001, Vol. 28, 7&8, p. 1013; Wagenvoort R., "Are finance constraints hindering the growth of SMEs in Europe?" in: Europe's changing financial landscape: The financing of small and medium-sized enterprises, EIB Papers Volume 08. n°2/2003.
33 Howorth C. and Reber B., "Habitual late payment of trade credit: an empirical examination of UK small firms", Managerial and Decision Economics, 2003, Vol. 24, 6-7, according to which a concentrated supplier base is shown to be positively associated with late payment. Their case studies provide evidence that this is because increased knowledge of suppliers' credit management procedures is used to pay late without penalties. 34 Source: Bacs Payment Schemes Limited (Bacs), 2007. 35
Study on Credit Management Practice in 10 European Economies, commissioned by Euler Hermes, 2006.
36 Research published on August 2007 by Creditsafe: http://www1.creditsafeuk.com/?id=975&cid=1110 .
37 Research conducted in 2007 by Bacs Payment Schemes Ltd.: http://www.bacs.co.uk/Bacs/Businesses/SME/Useful+tools/Late+payment+tips/Late+payment+tips.htm
38 BERR, Department for Business, Enterprise & Regulatory Reform, The Annual Survey of Small Businesses' Opinions 2006/07 (ASBS 2006/07), URN 07/389.
2.3.2. Debtor companies and public authorities paying late get free trade credit
When a business pays its suppliers on time and clients pay on time, its debts and credits are broadly in balance. But when, for instance, suppliers are paid within 30 days and clients only pay within 90 days, the resulting imbalance requires to be financed. Paying late is sometimes considered as a means of refinancing as opposed to applying for bank loans
39
. Trade credit is the single most important source of
external finance for firms. It appears on every balance sheet and represents more than one half of businesses' short term liabilities and a third of all firms' total liabilities in most OECD countries. For example, £18.6 billion is owed in outstanding (but no necessarily late) payments to Britain's SMEs in 2008 a leap of £2.6 billion compared with the year before. The average amount owed to an SME at any one time is £30,000
40
.
There is strong evidence that trade credit is used to alleviate credit constraints whereby firms insure each other against liquidity shocks, especially since suppliers continue to extend trade credit to firms that already defaulted on a payment in the past. Small, liquidity-strapped firms with little access to outside finance seem to pass liquidity shocks on to their suppliers by defaulting on trade credit
41
. If the supplier is
also small and short of liquidity and cannot raise fresh funds on short notice, a substantial portion of the shock is likely to be passed on further down the trade credit chain
42
.
2.3.3. Late payments have a negative impact on intra-community trade.
In most Member States, businesses perceive selling goods and services to businesses and authorities in another Member States as entailing a higher risk of late payment:
39 Cunat V., "Trade Credit: Suppliers as Debt Collectors and Insurance Providers", Universitat Pompeu Fabra & Financial Markets Group (LSE), May 2005; SMES under threat from late payments, Intrum Justitia, 2005, p. 13; Russo P.F. and Leva L, "The use of trade credit in Italy: how important are the financial motives", Bank of Italy, Working Paper No 496, June 2004; See table 3.10 in Annex 3. 40 Research commissioned by the Banker's Automated Clearing Services (Bacs) - 2008.
41 Peel M. J., Wilson N. and Howorth C., "Late Payment and Credit Management in the Small Firm Sector: Some Empirical Evidence", International Small Business Journal, 2000, 18, p. 17. 42 Boissay F. and Gropp R., "Trade credit defaults and liquidity provision by firms", ECB Working Paper No 753, May 2007.
Table 1.9: Terms of payment vs. actual payment in 11 Member States (number of days - 2007)
Differences in
Domestic trade Non-domestic trade actual delays
Actual Actual
Terms of Terms of
Member State of establishment payment Actual delay payment Actual delay payment payment period period
Austria 28 30 2 28 41 13 11 Belgium 35 41 6 35 45 10 4
Czech Republic 26 32 6 26 34 18 12 France 46 56 10 46 60 14 4
Germany 26 31 5 26 46 20 15 Hungary 29 36 7 29 38 9 2
Italy 81 80 -1 81 66 -15 -14 Poland 23 30 7 23 26 3 -4
Romania 30 32 2 30 28 -2 -4 Slovakia 26 31 5 26 32 6 1
United Kingdom 35 41 6 35 46 11 5 Source : Atradius Payment Practices Barometer Winter 2007 and May 2008
Among other reasons, the risk of late payment discourages enterprises from selling products and services in other Member States since it increases uncertainty and the cost of doing business. A buyer's inability or unwillingness to pay on time is one of the major commercial risks in cross-border trade risk management, in particular for SMEs
43
. In that case, transaction costs are higher due to asymmetric information and
insecurity about the market position and the solvency of a client established outside the domestic market
44
. The reverse side of this asymmetric information is that for
many debtors the risk to reputation related to late payment is much lower when the creditor is established in another Member State since the damage to reputation caused by late payment diminishes with distance. Late payment affects the business reputation of debtors much more when the creditor is established in the same Member State. Businesses that pay their invoices promptly usually focus more on good business relationships, tending to value the maintenance of relationships with their suppliers and the company's reputation as important.
Trade across national borders amplifies the costs of offering trade credit because language, jurisdiction and access to solvency data tend to be different and, thus, monitoring costs increase while the chances of successfully enforcing payment are lower. Economic studies show that with uncertainty about the repayment of trade credit the output level of a profit-maximising firm is below the level where there is
43 According to the Business Credit Index of April 2008, published by the Credit Management Research Centre (
http://www.cmrc.co.uk/surveys/business_credit_index/index.html ), medium sized firms indicate an overdue period of 26 days for payment by non-domestic customers and an average payment delay
of 21 days for domestic sales; the COFACE UK Export Survey 2007 ( http://www.cmrc.co.uk/surveys/export_survey/ ) indicates 27 overdue days for sales by UK companies to other EU Member States.
44 Portes R. and Rey H. "The Determinants of Cross-Border Equity Flows", Département et Laboratoire d'Economie Théorique et Appliquée de l'Ecole Normale Supérieure, Document N° 2001-08; Smith J.K., "Trade Credit and Informational Asymmetry", The Journal of Finance, Vol. 42, No. 4 (Sep., 1987), pp. 863-872.
45
revenue certainty . As a result, trade credit insurance and other instruments coping
with trade risk management are often used in cross-border trade. These instruments reduce revenue uncertainty but they increase production costs due to insurance premiums, factoring, buying information from agencies, using collecting agencies, bank guarantees etc. The cost of some of these services may absorb an important fraction of the profit margin, in particular of small enterprises.
The alternative to instruments coping with cross-border trade risk management is inhouse risk management. This either requires extra working capital to cope with uncertainty about the payment of the commercial debt, or obliges the supplier to charge higher prices to cover the payment risk. In the worst case, the supplier will refrain from selling his products or services in another Member State. In addition, due to the cross-border element, the administrative costs of sending reminders and contacting debtors are higher when the debtor is established in another Member State.
Table 1.10: Impact of late payments on intra-EU trade: some examples
A survey performed in late 2004 in the UK found that payment issues remained a deterrent to intra EU trade
46
. The issue of late payment has a bearing on the decisions of 46% of companies surveyed
when they consider working with companies from other countries of the EU.
In another survey 47 , more than 9000 companies interviewed in 22 European countries had indicated that payment uncertainty was seen as the major obstacle to cross-border trade.
2.4. How is the problem likely to develop?
The regulatory landscape applicable to the payment process and claims to obtain payment for commercial transactions in cross-border cases within the EU is being reshaped by new EU rules that recently entered into force or will soon apply. They are set out in detail in annex 4. The former will improve the speed and the efficiency of the payment process while the latter create new possibilities for judicial and extrajudicial claims for the recovery of outstanding payments for cross-border commercial transactions in the EU. The measures on judicial and extra-judicial claims are only expected to have a minor impact on late payment in commercial transactions. Their impact is more downstream in the process, i.e. when creditors consider that litigation is the most appropriate method for obtaining payment which, by definition, will be late.
2.5. Legal basis
Late payment can be an important impediment to intra-EU trade, especially for products and services to be sold in Member States where payment delays frequently occur (see section 2.3). The absence or ineffectiveness of national rules combating late payment could therefore unfairly protect national economic operators against products and services coming from other Member States. Failure by a Member State to act or take sufficient action to prevent obstacles to the free movement of goods or services originating in other Member States caused by late payment by private
45
Funatsu, H., "Export Credit Insurance", Journal of Risk and Insurance, 1986, 53, 4, 68092.
46 Credit Management Research Centre, 2004, http://www.payontime.co.uk/news/update_advice.html . 47 Intrum Justitia, European Payment Index 2004.
individuals or national authorities is just as damaging to intra-Community trade as a positive trade-restrictive act.
Therefore, the objective of ensuring the functioning of the internal market by reducing obstacles to intra-EU trade arising from late payment cannot be sufficiently achieved by Member States. It is therefore appropriate in accordance with the principle of subsidiarity, by reason of its scale and effects, to achieve it at Community level.
The fact that late payment in commercial transactions is still an impediment to intraCommunity trade means that any legislative proposal would have to be based on Article 95 of the Treaty, which is the legal basis of existing Directive 2000/35/EC. Non-legislative action would be based on Article 211 of the Treaty. The proportionality of the options will be assessed later in this report.
-
3.O BJECTIVES 3.1. General objectives Any Community initiative aiming at tackling the issue of late payment must ultimately:
Be conducive to the achievement of the broader and overarching competitiveness
·
48
goals enshrined in the renewed Lisbon Partnership for Growth and Jobs , i.e.
that Europe should become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth, creating more and better jobs, and developing greater social and regional cohesion; Significantly reduce administrative burdens on business, promote their cash flow
·
and help more people to become entrepreneurs, in accordance with the principles of the Small Business Act
49
, in which the facilitation of SMEs' access to finance
and the development of a legal and business environment supportive to timely payments in commercial transactions is earmarked as one of the 10 principles to guide the conception and implementation of SME policies both at EU and Member State level. Facilitate the smooth functioning and the completion of the internal market via
·
the elimination of related barriers to cross-border commercial transactions. In its vision for the 21
st
century single market, the Commission emphasized the need for
50
a strong, innovative and competitive internal market . The Single Market 51
review announced that the Commission would examine a range of initiatives to
48
Commission Communication: Working together for growth and jobs. A new start of the Lisbon strategy, COM(2005)24.
49 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions - "Think Small First" - A "Small Business Act" for Europe, COM(2008)394final of 25 June 2008. 50 COM(2007) 60, 21.2.2007.
51 Commission Communication: A single market for 21st century Europe, COM(2007) 724 final.
foster the right conditions for small and medium-sized businesses and to improve framework conditions for businesses.
Such initiative would also provide an important impetus to overcome the current economic crisis by contributing to the implementation of the European Economic Recovery Plan
52
and promoting businesses' cash flow in order to reinforce the
competitiveness of European enterprises in the long term.
3.2. Specific objectives
Any future policy should provide economic operators involved in commercial transactions with a business environment that promotes the timely payment of commercial debts whereby:
The competitiveness of European businesses, in particular SMEs is improved by a
substantial reduction in late payments for commercial transactions within the EU and by a reduction of excessively long periods of payment, in particular by public authorities;
The discouraging effect of late payment in cross-border commercial transactions
is reduced.
3.3. Operational objectives Concretely, this translates into the following twin operational objectives:
(1) Confront debtors with measures that successfully discourage them from paying late or from requiring excessively long contractual payment periods; and (2) Provide creditors with measures that enable them to fully and effectively exercise their rights when paid late.
-
4.P OLICY OPTIONS 4.1. Overview of policy options - Subsidiarity and proportionality
It should be noted that, for some important aspects of the three first problem causes set out in section 2.2, the EU does not necessarily have the power to act. Certain problems related to the structure of national or regional markets should be dealt with by Member States while, as regards the business cycle, most of the economic policy levers are in the hands of the Member States so that no overall solution for all problem causes can be found at EU level. In addition, certain options had to be discarded at an early stage for the reasons set out in Annex 5.
52 COM(2008)800, 26.11.2008.
Table 1.11: Overview of all policy options
(1) Discarded options (see
Problem causes (2) Non-legislative options (3) Legislative options Annex 5)
2.2.1: the market structure - Option 2a: the organisation of awareness raising activities targeted at businesses - Option 2b: the organisation of awareness raising activities targeted at SME organisations - Option 3a: Full harmonisation of payment periods 2.2.2: the business cycle
2.2.3: access to finance and budgetary constraints - The creation of a European Fund aimed at providing finance to SMEs. - Option 3a: Full harmonisation of payment periods
2.2.4: the internal organisation of creditors and debtors - A new programme to enhance SME capabilities; - Promoting the use of Escrow Facilities (nonlegislative option); - Promoting the use of securities (non-legislative option); - Developing and Promoting Credit and Financial Management Programmes (nonlegislative option). - Option 2c: the publication of information on bad debtors; - Option 2a: the organisation of awareness raising activities targeted at businesses - Option 2b: the organisation of awareness raising activities targeted at SME organisations - Option 3f: Strengthen the role of representing organisations - Option 3g: Encourage timely payment by compulsory information of debtors 2.2.5: The absence of effective and efficient remedies - Repeal of the Directive; - Exempt income in the form of late payment interest from VAT. - Option 3b: Increase of the statutory interest rate - Option 3c: Abolition of the threshold of 5 - Option 3d: introduction of a "Late Payment Fee" - Option 3e: introduction of the "Late Payment Compensation"
Consequently, this impact assessment will concentrate primarily on the problem causes on which the EU has the right to act. The legislative options are predicated on the principle that the EU should only legislate to the extent necessary. Regarding the nature and the extent of Community action, the options leave as much scope for national decision as possible, consistent with securing the aim of the measure and observing the requirements of the Treaty. Well established national arrangements and the organisation and working of Member States' legal systems should be respected. None of the options is exclusive.
Table 1.12: Overview of policy options subjected to an in-depth impact analysis
Operational (1) Baseline: No change (2) Non-legislative options (3) Legislative options objective (see annex 4)
Provide creditors with measures that enable them to fully and effectively exercise their rights when paid late. - SEPA will improve efficiency of payments - Debt collection agencies will benefit from Services Directive 2006/23/EC - Access to alternative dispute resolution will be improved by Directive 2008/52/EC - Option 2a: the organisation of awareness raising activities targeted at businesses - Option 2b: the organisation of awareness raising activities targeted at SME organisations - Option 3a: Full harmonisation of payment periods - Option 3b: Increase of the statutory interest rate - Option 3c: Abolition of the threshold of 5 - Option 3d: introduction of a "Late Payment Fee" - Option 3e: introduction of the "Late Payment Compensation" - Option 3f: Strengthen the role of representing organisations - Option 3g: Encourage timely payment by compulsory information of debtors Confront debtors with measures that successfully discourage them from paying late or from requiring excessively long contractual payment periods. - Regulation 1896/2006 on European order for payment procedure - Regulation 805/2004 creating a European Enforcement Order for uncontested claims - Regulation (EC) No 44/2001 on judgments in civil and commercial matters - Option 2c: the publication of information on bad debtors 4.2. Baseline option: no policy change
The baseline option consists of the measures outlined in section 2.4 and annex 4. They only relate to the payment process and claims to obtain payment for commercial transactions in cross-border cases within the EU. Consequently, any further policy options should only focus on measures encouraging timely payment, without considering the technical aspects of the payment process or late payment made following debt collection measures by third parties, alternative dispute resolution or judicial proceedings.
4.3. Non-legislative options 4.3.1. Option 2a: The organisation of awareness raising activities targeted at businesses
Despite certain weaknesses of the Directive, its provisions could be disseminated to a wider audience of economic operators so that they can fully grasp its potential benefits.
This could be done in the first place through guides and specific websites specifically addressed to economic operators and other stakeholders like SME organisations. A dedicated section on late payment could, for example, be included in the SME portal
53 54
and on the Your EuropeBusiness Portal . Other more tailor-made
awareness raising activities, like conferences and seminars, could complement the guides and websites and could be organised in cooperation with the Enterprise Europe Network
55
. Awareness-raising activities should also cover national debt
53
http://www.enterprise-europe-network.ec.europa.eu/index_en.htm 54 http://ec.europa.eu/enterprise/sme/index_en.htm 55 http://ec.europa.eu/youreurope/business/index_en.htm
settlement procedures. Finally, exchange of best practice between Member States could be promoted.
4.3.2. Option 2b: The organisation of awareness-raising activities targeted at
organisations representing SMEs
The Directive provides for the possibility for organisations representing SME's to take action with regard to unfair clauses. Until now, there are very few indications that these representative organisations have actually fully exploited this possibility which could be highlighted in awareness-raising activities specifically targeting SME representative organisations. These would aim to prevent the inclusion of grossly unfair clauses in future contracts through, inter alia, the application of competition rules to cases of unfair contract clauses and excessive use of dominance by large customers. They should also cover codes of best practice that identify abusive practices and unfair terms.
4.3.3. Option 2c: Publication of information on bad debtors
Detailed information on the identity of bad debtors is currently not made publicly available by companies. Under this option, companies would publish (either voluntarily or by law) detailed information on bad debtors in their annual returns, so that regular late payers could become more easily identifiable
56
.
4.4. Legislative options 4.4.1. Option 3a: Full harmonisation of payment periods
Under this option, payment periods together with the calculation and timing of interest chargeable on late payment would be harmonised in all contracts to protect the weaker party during contract negotiation and in contracts with public authorities. A maximum payment period of 30 days (corresponding to the "default period" under the current Directive) would apply to commercial contracts across Member States. This option presupposes that current rules on interest for late payment are maintained.
4.4.2. Option 3b: increasing the "margin" interest rate
The objective of this measure would be to compensate the creditor while creating an incentive for the debtor to change behaviour, resulting in improvements to payment practice. It would involve a substantial increase in the "margin" interest rate for late payment above the 7% currently in force. For the purposes of this assessment, it is proposed that the rate introduced be the ECB rate plus a "margin" interest rate of 12%.
56
This option does not address the transparency of debtors' assets in the European Union in the framework of the enforcement of judicial decisions in the European Union, about which the Commission published a Green Paper COM(2008)128 on 6.3.2008.
4.4.3. Option 3c: the abolition of the threshold of 5
The Directive specifies that Member States may exclude claims for interest of less than 5. A stronger deterrent effect would be achieved if, in all cases, the interest could be imposed on the first day of a payment becomes overdue. Therefore, the threshold of 5 would be repealed under this option.
4.4.4. Option 3d: the introduction of a "Late Payment Fee"
This option introduces a fixed "Late Payment Fee" for the recovery of administrative costs and compensation for internal costs incurred due to late payment. This minimum fee would be cumulated with interest for late payment and would become payable automatically from the first day after payment becomes overdue:
Table 1.13: Late Payment Fee (option 3d)
Fixed minimum amount to be paid by the
Amount of late payment
creditor
Not exceeding 1000 40 Exceeding 1000 70
These amounts are slightly progressive since more important debts usually require more attention and corresponding credit management time, and a more formal approach to cash collection (formal reminders, legal counselling, etc). For higher amounts of late payment, senior management levels and/or external accountants, debt collection services or solicitors are more likely to be involved.
4.4.5. Option 3e: the introduction of a "Late Payment Compensation"
A sufficiently high financial compensation for the recovery costs related to late payment can be a serious discouragement, in particular for smaller debts. Under this option, the compensation would amount to 1% of the amount due in order to recover the costs of involving senior management levels and/or external accountants, debt collection services or solicitors. This compensation would also be cumulated with the interest for late payment. It could be increased in case of further delays.
4.4.6. Option 3f: Strengthen the role of representative organisations
At the moment, in the Directive the role of organisations officially recognised as, or having a legitimate interest in, representing SMEs is fairly limited: they may take action before the courts or before competent administrative bodies under national law on the grounds that contractual terms drawn up for general use are grossly unfair within the meaning of Article 3(3), so that appropriate and effective measures are taken to prevent the continued use of such terms
57
.
Under this option, representative organisations would also be entitled to claim payment of invoices that should have been paid and all related amounts (e.g. interest for late payment) through a representative action. This would be an action brought by a representative organisation on behalf of businesses who are not themselves party to the action, and aimed at obtaining damages for the individual harm caused to the
57 See Annex 7.
interests of all those represented (and not the representative entity itself). It would be left to the Member States to set criteria to define which organisations would qualify but these could include professional associations, public authorities specifically responsible for SME protection, chambers of commerce and industry, etc.
-
5.A NALYSIS OF IMPACTS
All quantitative data about payment delays used in this impact assessment are based on different types of surveys and interviews. Surveys usually collect information on the perception of late payment as a problem and trends in the number and value of accounts paid on time. The data collected could potentially suffer from selection bias or respondents' bias towards the subject whereby, for example, respondents consider that payments following a contested claim or a judgement are also late payments. Businesses that are sensitive to the payment behaviour of their customers are more likely to indicate that payments are "late" than businesses that have the financial strength to absorb some variations in payment times and/or anticipate actual payment behaviour. Despite all efforts, there are no hard scientific data based on a detailed analysis of all payments made by and to a reliable sample of economic operators throughout the EU.
Moreover, the Directive is an optional instrument for economic operators in so far as it does not oblige them to claim interest for late payment. The directive also operates in a field where many other factors could influence the payment performance in B2B transactions
58
. The regulatory landscape applicable to the payment process and
judicial claims to obtain payment for commercial transactions in cross-border cases within the EU is being reshaped by new EU rules that recently entered into force or will soon apply. It is hard to account for interconnection and spill-over effects in the baseline scenario. Thus, it is only possible to provide indicative quantitative estimates of the possible economic and social impacts of any given option. Therefore, the analysis is mainly qualitative. It should be noted that none of the options would have an environmental impact or third country implications.
Some causes of problems where the EU does not have the power to act will nevertheless influence the uptake of certain options. The market structure and the position of an economic operator in a market will determine to a large extent his willingness to take action against a late paying debtor and to run the risk of damaging a business relationship which might be worth several thousand Euros. There are many other similar individual factors which will all be neutralised whenever possible during this impact assessment. For the same reason, it was impossible to identify direct social impacts.
The policy options are assessed in the light of the baseline option in terms of their effectiveness
59 60 61
, efficiency and consistency
58 See Table 3.11 in Annex 3.
59 The extent to which options can be expected to achieve the objectives of the proposal.
60 The extent to which objectives can be achieved for a given level of resources/at least cost (costeffectiveness). 61 The extent to which options are likely to limit trade-offs across the economic, social, and environmental domain.
5.1. Option 1: baseline option
The base-line option comprises a number of recently adopted measures that will quicken the payment process and introduce new means of pursuing judicial and extra-judicial claims for the recovery of outstanding payments for commercial transactions in cross-border cases within the EU. An important side-effect of these measures is their possible positive influence on the payment attitude of debtors.
It should however be noted that these measures will have no impact on late payments for which no debt collection by third parties, alternative dispute resolution or judicial proceedings are initiated.
Moreover, the ambiguity arising from certain provisions of the Directive will not be fixed under this option. Examples of unclear, inextricable or unmanageable provisions that remain unsolved under this option include the calculation of the applicable interest rate, the nature and extent of "retention of title", the types of commercial transactions covered by the Directive, the definition of "relevant recovery costs" and the possibility of compound interest.
5.2. Option 2a (non-legislative): The organisation of awareness raising activities targeted at businesses The main advantage of awareness-raising activities resides in their flexibility and the scope for active participation by all stakeholders.
Since awareness is not the most important impediment to claiming interest for late payment, the most important inconvenience of this option is its very minimal efficiency. Experience shows that these activities can take several years and thus tie up substantial resources, certainly when they should reach (new) businesses in all 27 Member States. Moreover, following the transposition of Directive 2000/35/EC, national authorities and representative organisations have already organised, and are still organising, numerous awareness-raising activities targeted at businesses, especially SME's. There is a significant risk that any future similar activities will also fail to reach an important part of this specific target audience. It is highly likely that the audience reached will remain fairly small: about 13% of EBTP respondents and 11% of IPM respondents never claim interest for late payment due to unawareness about the right to claim interest.
Another negative aspect of this option is its very limited effectiveness: awarenessraising activities would only address a few of the problems set out above. Many problems are inherent in the text of the Directive and awareness-raising cannot resolve these. Any attempted clarification of its provisions would have no binding value, which would add an element of uncertainty. Awareness-raising and informal guidelines have only de facto, but no legal, force. Legal force may, however, be required in critical cases. Moreover, this option would have no impact on any other parties than enterprises.
Table 1.14: Summary of impacts of option 2a
Effectiveness No: no impact on debtors and minimal impact on creditors
Efficiency No: requires too many resources for a very uncertain result.
Consistency Yes: trade-offs across other domains could not be identified.
5.3. Option 2b (non-legislative): The organisation of awareness raising activities targeted at organisations representing SMEs
The possibility for organisations representing SME's to take action with regard to unfair clauses could be highlighted in awareness raising actions that specifically target these organisations. The advantage of this option is the flexibility of these awareness raising activities and the possibility of an active participation by all stakeholders, combined, with the fairly limited number of these organisations throughout the EU. Therefore, it should be fairly easy to reach them. It is estimated that the cost for the Commission would amount to 300,000 per year.
However, there are several important uncertainties regarding the effectiveness of this option. A prerequisite for these awareness raising actions is that Member States have put in place, in the interests of creditors and of competitors, adequate and effective means to prevent the continued use of terms which are grossly unfair (Article 3(4)). The success of this option depends on an active participation of the competent authorities in Member States responsible for the implementation of these adequate and effective means. In addition, awareness raising activities do not solve the fundamental problem of the limited role of representative organisations laid down in the Directive. Their role, as laid down in the Directive, does not concern ongoing contracts. This limitation may discourage businesses from reporting grossly unfair clauses to the representative organisations. In addition, these organisations may refrain from taking action in cases where they represent both suppliers and clients in a particular sector and where they may be faced with an internal conflict of interests.
Table 1.15: Summary of impacts of option 2b
Effectiveness No: objectives are unlikely to be achieved.
Efficiency Yes: fairly low budgetary cost for the EU. No other costs.
Consistency Yes: trade-offs across other domains could not be identified.
5.4. Option 2c (non-legislative): Publication of information on bad debtors
The publication of detailed figures about bad debtors in the accounts receivable would certainly constitute valuable information for other businesses, including credit reference organisations. This option would enable creditors to identify potential debtors in a way that does not directly threaten their commercial relationship with them. Such publication could warn other economic operators of the risks of doing business with persistent late payers. This would enable companies to focus time in negotiating contracts with "higher risk customers", as part of a risk based strategy. It could also help reduce the number of grossly unfair clauses in contracts. The additional element of "naming and shaming" of persistent late payers under this option would provide an incentive to companies to maintain their reputation by ensuring that they pay their accounts on time. Similarly, the measure would facilitate the consolidation of publicly available information on poor-paying public institutions and industry sectors and would thus provide valuable information for organisations lobbying government and industries for better performance as regards payment times.
There seems to be more support for this preventive measure from large companies than smaller companies. The measure could have a considerable impact on major companies if they believed that their reputations could be damaged by adverse
publicity. It could become an issue of public interest, as part of overall social responsibility.
However, this option creates more problems than it would solve:
There are many practical drawbacks. Firstly, the quality of reporting on disputed
·
cases and cases in which a business went through a short difficult period needs particular attention. Secondly, businesses with a high number of invoices may appear to have paid a larger number of invoices late, even though the actual proportion of its total is low. Thirdly, many businesses, and especially SME's, may be reluctant to "name and shame" individual creditors for business relationship reasons or out of fear of possible claims for damages for unjustified reporting. Fourthly, this option could oblige businesses to disclose commercially sensitive information about their business relations or their cost components. Fifthly, the onus of reporting and dealing with the issue of late payments would rest more heavily on small companies which, in most cases, are the victims of the late payments and not the perpetrators
62
. This at a time when strenuous efforts are
being made under our Better Regulation policies to reduce the burden of corporate reporting requirements on SMEs. The information would be scattered in thousands of annual accounts and would
·
therefore not be easily accessible to other enterprises, except credit rating agencies. That implies that economic operators would have to use credit rating agencies to obtain information on the payment performance of possible clients. The alternative would be the appointment by every Member States of a body to gather information on bad debtors and make this information publicly available. This would generate extra-costs for the Member States. Considering that the development of a national database would cost a minimum of 3 million per Member State and that maintenance and updating as well the preparation and dissemination of guidelines, plus the provision of training to tax services and accountants would at least amount to 500,000 per year per Member State, the total cost for the entire EU could easily amount to 90 million or more during the start-up phase. Moreover, this measure would require legislative changes in national accounting rules. Substantial national differences between the implementation of these measures within the Member States could call into question the reliability of the data in case of cross-border commercial transactions. Above all, the additional administrative cost for many, especially small,
·
businesses would be disproportionately high. The administrative effort to consolidate the information from myriad small accounts would be very burdensome for businesses since they would be obliged to gather information during the entire year to give a real picture of which companies were the worst offenders in late payment. The estimated administrative costs to companies of
62
This type of measure was also assessed by the Irish authorities: http://www.entemp.ie/publications/enterprise/2007/THIRDPROGRESSREPORT(FINALVersionof10D ecember2007).pdf
. They came to the conclusion that it seems likely that small companies would derive
significantly less benefit from such a provision than may have been envisaged in the beginning. This report calls into question the balance between that benefit and the potential adverse impacts that would be associated with implementation of the measure, including the additional regulatory burden for those companies that would be required to file the information specified in their annual accounts.
meeting the reporting requirements are summarised in the next table. The bulk of these costs would be borne by SMEs rather than by the large companies who are generally
considered to be the root of the problem.
Table 1.16: Costs to companies from reporting requirements
All 27 EU MS
SME Large
Number of companies 23,000,000 41,000
Hours per undertaking on retrieving information 20 30 Hours per external for checking and adjusting 10 15 Total costs (m) 25,300,000,000 86,100,000 The impacts of this option can be summarised as follows:
Table 1.17: Summary of impacts of option 2c
Effectiveness Doubtful: possible preventive effect on creditors but many practical drawbacks for its implementation Efficiency No: very high administrative costs for businesses.
Consistency Yes: trade-offs across other domains could be not identified.
5.5. Option 3a (legislative): Harmonisation of payment periods
At first glance, the advantages of this option are numerous. Harmonised payment periods would put an end to the practice of circumventing the current rules combating late payment by contracts containing very long payment periods. This option would also prevent the inclusion of grossly unfair contractual payment terms in contracts. By introducing standard payment periods, the measure would address the inherent lack of understanding and expertise (especially on the part of SMEs) in identifying grossly unfair contractual clauses and contesting them before entering into a contract.
Moreover, some argue that harmonised payment periods would promote (quicker) contracts between undertakings in different Member States. It would also encourage enterprises to participate in public procurement procedures in other Member States. The potential costs associated with a loss of contractual freedom could be offset by the reduction in administrative costs in applying European law. The costs presently incurred in cross border trade include duplicating documents for different legal systems and consulting legal experts for advice. More than 67% of EBTP respondents and almost 80% of IPM respondents support this possibility.
5.5.1. Option 3a/1: The harmonisation of payment periods between economic operators
Analysis of a possible harmonisation of payment periods between economic operators reveals that it would have many drawbacks and could be contrary to the principles of proportionality and subsidiarity:
This option may not be very effective in reality. Late payment would be a breach
·
of contract which would not necessarily be acted on by the creditor out of fear of damaging the commercial relationship with the client, or due to the administrative burden of claiming interest, insufficient resources (in particular of SMEs) or lack of knowledge how to calculate late payment interest. A breach of contract does not necessarily mean that expenses incurred in suing the debtor can be recovered. Even where there is a clear breach of contract, chasing late paying clients or charging interests for late payments generate administrative costs that many
businesses wish to avoid. Moreover, the current rules define late payment already as "exceeding the contractual or statutory period of payment" (Article 2(2) of the Directive) meaning that all late payments are a consequence of a breach of contract. The payment period is typically one of the negotiable items of a contract. It is a
·
63
part of trade credit between enterprises which, as such, does not necessarily
constitute a problem for the creditor as long as he knows when he can expect payment. It is important to bear in mind that trade credit, i.e. the granting to a customer by a supplier of goods or services of a deferral in the time to pay, is a major competitive tool for many small businesses
64
. Most commercial
transactions are made on credit terms and trade credit is an important source of funding for small businesses. Studies show that small firms extend trade credit more aggressively than medium and large firms. This behaviour even occurs in those firms in financial distress. Larger firms, with better access to alternative internal and external financing and with a lower cost, use less credit from suppliers. Moreover, firms with higher growth opportunities use more trade credit for financing sales growth
65
.
Table 1.18: Trade Credit as a component of business strategy
Market signalling and Differentiation Credit acts as an implicit guarantee of product quality. Available credit terms provide a `quality signal' to potential buyers. Offering credit may be a key factor that differentiates one supplier among competing suppliers. Customer Loyalty & Information Trade credit can be used to `tie-in' customers and encourage repeat purchase i.e. `building relationships'. Extending credit generates potentially useful information on customers.
Price Discrimination & Price competition Offering credit terms provides more opportunities for varying effective price to buyers with different elasticities of demand or different credit risk. Credit terms can be an important element of price competition and the `marketing-mix' in competitive markets Cost Leadership Offering a package of both product and finance that is cheaper than a buyer negotiating with two parties (supplier & financier) may generate profitable sales. The supplier may generate profit from both activities - profit margin on the product; (premium) interest on the finance.
Managing Uncertainties Using and extending trade credit can be used to reduce the uncertainties in trading relationships and minimise `transaction costs'. To make money available, firms have to convert liquid assets into cash. The costs for doing this may be greater if conversion is frequent and/or for small amounts, consequently firms have a demand for precautionary cash balances. Trade credit reduces the need for this, particularly where there is uncertainty in the trade
63
Summers B. and Wilson N., "Trade credit and customer relationships", Managerial and Decision Economics, 2003, Vol. 24, 6-7; See also Ng C.K., Smith J.K. and Smith R.L., "Evidence on the Determinants of Credit Terms Used in Interfirm Trade", The Journal of Finance, 1999, Vol. 54, 3, p. 1109. 64
Wilson N., Le Duc L.T. and Wetherhill P., "Trade Credit and Monetary Policy in the UK: An Empirical Investigation" (December 2004). Available at SSRN: http://ssrn.com/abstract=675630; RodríguezRodríguez O.M., "Trade Credit in Small and Medium Size Firms: An Application of the System Estimator With Panel Data", Small Business Economics, 2006., Vol. 27, 2-3. 65
Garcia-Teruel P.J. and Martinez-Solano P., "A dynamic perspective on the determinants of accounts payable", Department of Management and Finance, Faculty of Economics and Business, University of Murcia (Spain), October 2006.
exchange. It can therefore help the firm develop an environment conducive to innovation.
Source: Wilson ., "An Investigation into Payment Trends and Behaviour in the UK: 1997-
2007", Department for Business, Enterprise & Regulatory Reform and CMRC, 2008.
· The rules combating late payment do not yet fully harmonise national laws but
rather focus on compliance with some minimum requirements that apply across the EU. Currently, businesses are not obliged to apply these rules and to claim their rights. This fundamental principle would be dropped for a more compulsory approach that would deprive economic operators of a valuable commercial element. Furthermore, many businesses will try to circumvent these rules by slicing a limited number of contractual payments into a much higher number of contractual payments which will increase the administrative burden for businesses. The adjustment and compliance costs of this option could be considerable for
·
enterprises. They would be obliged to adapt their new contracts to the harmonised provisions. This may significantly alter some companies' cash flows both positively and negatively where they have been used to dealing with contractual provisions involving long payment periods
66
. It is important to recognise that
many of these negotiated elements are part of the competitive process by which buyers and sellers interact so that the benefits stemming from freedom of negotiation may compensate for the costs related to barriers to trade and other problems already explained (i.e. lack of expertise on negotiation, time, etc.). Moreover, establishing statutory contract periods and terms within contracts means a loss of contractual freedom by removing the ability of companies to compete through payment periods offered to clients. This could in turn put more pressure on other aspects of contract negotiation where larger companies can still exercise significant influence over small company suppliers, the most obvious being price. Debtors might also negotiate different payment terms and payment by instalments in response to a harmonisation of payment periods.
It is difficult to quantify precisely the costs and benefits of this option since a number of factors are too uncertain to be calculated, e.g. the potential loss in turnover, the contract negotiation costs, the financial consequences of reduced trade credit, etc. Tables 3.20 to 3.27 in Annex 3 show scenario calculations for a harmonization of payment terms to 30 days across the board with 4 different scenarios: a baseline scenario (current payment terms and late payment patterns), an optimum scenario (reduction of payment terms to 30 days maximum and no late payment, i.e. effective payment equal to payment term), a realistic scenario (reduction of payment terms to 30 days maximum and a proportional reduction of late payment whereby late payment expressed in days represents the same proportion to the contractual payment term than in the baseline scenario) and a worst scenario (reduction payment terms to 30
days but without a reduction of effective payment delays).
66 See Table 3.12 in Annex 3.
Table 1.19: scenario calculations for B2B regarding the proposal of harmonization of payment
terms to 30 days across the board - Net effect (in mio EURO - gains +, loss -))
Optimum
Baseline scenario Realistic scenario Worst scenario scenario (Table
(Table 3.21) (Table 3.25) (Table 3.27) 3.23)
-2,682.4 4,749.2 2,563.9 -1,446.8 Belgium
Bulgaria -- -- -- --
Czech Rep. -1,557.0 1,562.7 0.0 0.0 Denmark -762.9 689.3 0.0 0.0
Germany -7,389.0 7,461.5 0.0 0.0 Estonia -138.4 51.6 0.0 0.0
Ireland -1,549.7 2,683.1 1,485.4 -767.8
Greece -1,906.7 8,088.9 7,391.9 -3,963.7
Spain -8,518.5 41,204.1 37,662.1 -22,933.2
France -13,264.7 35,122.0 26,931.9 -15,780.5 Italy -14,369.5 54,861.8 48,434.9 -27,344.9 Cyprus -163.2 479.3 405.0 -212.3 Latvia -275.3 -- 0.0 0.0
Lithuania -317.9 328.1 12.7 -6.0 Luxembourg -- -- -- --
Hungary -2,105.3 1,666.7 0.0 0.0 Malta -- -- -- --
Netherlands -3,565.9 2,574.9 0.0 0.0 Austria -1,161.7 727.4 0.0 0.0
Poland -3,404.3 3,355.4 0.0 0.0
Portugal -2,694.0 4,730.7 2,988.0 -1,394.8 Romania -- -- -- --
Slovenia -- -- -- --
Slovakia -184.3 218.8 40.4 -23.0 Finland -529.6 0.0 0.0 0.0
Sweden -1,160.0 664.0 0.0 0.0
U.K. -17,219.0 21,531.5 5,878.4 -3,101.6
Total -84,919.2 192,750.9 133,794.6 -76,974.7 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and Eurostat turnover figures
Table 1.19 shows that the potential benefits of this option would be very impressive under the optimum and realistic scenario, and that the situation would slightly improve in the worst scenario. The probability of the optimum scenario is, however, very low.
In any event, it is certain that the harmonisation of payment periods for commercial transactions would undermine the possibility for smaller firms to receive trade credit from their suppliers, in particular during a period of monetary contraction.
Consequently, the impact of this option would be negative for those European businesses using trade credit, especially for SMEs
67
.
Table 1.20: Summary of impacts of option 3a/1
Effectiveness Yes: likely to lead to less late payments
Efficiency No: Considerable compliance and adjustment costs.
Consistency No: loss of contractual freedom by removing the ability of companies to compete through payment periods offered to clients. This could in turn put more pressure on other aspects of contract negotiation where larger companies can still exercise significant influence over small company suppliers 5.5.2. Option 3a/2: the harmonisation of the periods for payment by national authorities to
economic operators
A possible harmonisation of payment periods by national authorities to economic operators reveals that it would not have any of the drawbacks set out in section 5.5.1:
The fear of damaging the commercial relationship with the client should not exist
·
in contracts concluded with national authorities. The risk that a claim for interest for late payment would have a negative effect on the chance of winning a new contract in another procurement process is minimal. The public procurement directives
68
and the national rules on procurement procedures below the threshold
already provide a number of procedural guarantees protecting economic operators from negative attitudes of the awarding authority. For the public contracts that are not, or are only partially, covered by the Directive, the principles of equal treatment and non-discrimination on grounds of nationality imply an obligation of transparency which, according to the case-law of the Court of Justice, "consists in ensuring, for the benefit of any potential tenderer, a degree of advertising sufficient to enable the services market to be opened up to competition and the impartiality of the procedures to be reviewed." Only in very exceptional cases is the payment period one of the negotiable items
·
of a contract awarded by a public authority. The competitive advantages of trade credit between enterprises do not apply to contracts concluded by public authorities. The budgetary impact for national authorities would remain fairly limited
·
compared with the additional liquidity that earlier payment by public authorities would generate for businesses. Public authorities can obtain financing at much more attractive conditions than private undertakings. It is estimated that this option would cost public authorities 7.25 billion euro but that the additional
67 For similar reasons, the Irish authorities also came to the conclusion that possible advantages of this idea are very much outweighed by the significant disadvantages that could arise, that it is a disproportionate response to the issue of late payments. See http://www.entemp.ie/enterprise/smes/publications.htm .
68 Directive 2004/17/EC of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sectors (OJ L 134, 30.4.2004, p. 1113) and Directive 2004/18/EC of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (OJ L 134, 30.4.2004, p. 114240). These directives do not concern the content of the contract or its performance.
69
liquidity for businesses would amount to 179.11 billion euro . Assuming that this
measure will be effective and that national authorities will pay within the legal deadline, the actual amount spent on procurement would not increase but, for some Member States, payment may have to take place earlier in the year. This could have an effect on the scheduling of cash expenditure for Member States in which payment periods for public authorities exceed 30 days. According to Table 3.3, there would be no - or a negligible - impact on cash management for most public authorities in 19 Member States. Some public authorities in the 8 remaining Member States would have to change their cash management practices and they would lose bank interest for the period between the current payment date and the future payment date or, in case of late payment, they would have to pay interest for late payment. Nevertheless, it is safe to assume that mismatches between the timing of payments and the availability of cash might result in conditions of temporary cash surpluses or temporary cash shortfalls for public authorities if they fail to implement active daily cash management. Member States with complex expenditure approval processes may have to eliminate duplication of responsibilities of multiple players involved in intermediate handling. In the absence of any reliable scientific data on the actual payment practices of public authorities, it is impossible to estimate the budgetary impact of this option.
· This option should not entail any adjustment and compliance costs for economic operators.
The effectiveness of this option will depend upon the willingness of businesses to
·
enforce their rights and upon a sufficiently high sanction in case of late payment. Where private debtors might heavily damage their commercial or professional reputation by paying late and loose the trust of their creditors in long-term commercial relationships, public authorities are in a more comfortable position since reputation and long-term trust are less important factors when authorities procure goods and services. Furthermore, the feeling of impunity may arise within public authorities due to the slowness and prohibitive cost of legal procedures to claim payment against public authorities, the greater availability of legal resources, less legal possibilities to seize public property and the non-deterrent rate of the statutory interest.
Table 1.21: Summary of impacts of option 3a/2
Effectiveness Yes: fear of damaging the commercial relationship with the client should not exist in contracts concluded with national authorities. Moreover, the payment period is normally not a negotiable item of a contract awarded by a public authority. However, a sufficiently high sanction in case of late payment needs to be foreseen. Efficiency Yes: budgetary impact for national authorities would remain fairly limited compared with the additional liquidity that earlier payment by public authorities would generate for businesses. Consistency Yes: trade-offs across other domains could not be identified.
69 See Tables 3.15, 3.16 and 3.17 in Annex 3. It should be noted that these estimates are made on the basis of the figures in Tables 3.1 to 3.6 and Table 3.14 which are based on surveys. Therefore, it is possible that public authorities pay their major invoices on time and postpone payment for smaller invoices, or vice versa.
5.6. Option 3b (legislative): increasing the "margin" interest rate
This option has many positive aspects. Increasing the "margin" interest rate for late payment from 7% to 12% would certainly constitute a strong deterrent for debtors, as well as a strong incentive for creditors. The impact on trade credit would be negligible since creditors would still be entitled to fix a payment period in line with the trade credit they are prepared to grant to their client. However, there is a risk that some companies could take advantage of their unequal negotiating power and force smaller businesses to consent to longer payment periods to avoid paying interest for late payment.
Obviously, this option could have a strong impact on businesses and authorities paying late systematically. In order to avoid the negative financial consequences of late payments, they would have to pay on time, seek bank credit or start negotiating a longer payment period that could be accepted by both parties. However, a linear increase of the "margin" interest rate would have a linear impact on claims for late payment so that the deterrent effect of this measure might be bigger for late payment due to larger businesses. Considering that larger businesses are usually more familiar with charging interest which is often higher than the statutory rate, they would probably be the main beneficiaries of this option. Assuming that smaller businesses usually invoice smaller amounts, this option would hardly have any effect on them, in particular in the light of their narrow client spread and the resulting over-reliance on specific client activity to maintain revenue streams.
Debt collection agencies would benefit by collecting interest on the overdue debts of their clients along with some collection costs and could pass this benefit onto their clients in the form of lower commission rates. Factoring agencies can apply interest charges on the trade debts of the debtor and collect the interest. Other parties dealing with debt collection would equally benefit.
Although, at first sight, this option seems to present many positive sides, the negative aspects of this option need to be highlighted. The effectiveness and the efficiency of this option are doubtful:
· During the public consultations, stakeholders seemed to be satisfied with the
current "margin" interest rate . 61% of EBPT respondents and 59% of IPM
respondents took the view that the current rate is reasonable and proportionate to encourage timely payment. This may be due to the fact that, in the case of a late payment, the usual response for 22% of EBTP respondents and 30% of IPM respondents is to postpone their own payments to their creditors. The "pass-on" effect of late payments can turn creditors into debtors. Given that all businesses are creditors and debtors at the same time, stakeholders may have answered this part of the EBTP and IPM questionnaires as debtors rather than creditors. Businesses are already entitled to negotiate a higher interest rate in the contract or
·
to include a higher rate in their commercial conditions. The current "margin" interest rate is only a minimum interest rate so creditors may deviate from that rate and charge a higher interest rate for late payment. The current rules allow Member States to provide for a higher minimum "margin"
·
rate in their national legislation.
This option could strengthen the position of bigger or more powerful businesses.
·
Some experts argue that interest for late payment reinforces the bargaining position of firms that ask for a discount for early payment. These firms consider that, if interest can be charged for late payment, an equivalent discount should be given for early payment. One possible further issue with the current statutory interest rate is that this was set with a view to `compensating' small businesses based on their average cost of capital. However the same rate applies to large businesses which generally have a much lower cost of capital. Therefore, one could argue that large businesses are `more than compensated' and in fact have an incentive to enforce interest penalties. This is particularly the case if they are less fearful of losing business by applying penalties
70
.
Businesses working with pre-printed invoices would have to bear a fairly small
·
amount of adjustment costs when they amended their general commercial conditions to adapt to this option. It is reasonable to believe that these costs would be quickly recovered by more timely payments and by interest on late payment paid by debtors.
Table 1.22: Summary of impacts of option 3b
Effectiveness Doubtful: stakeholders seem to be satisfied with the current "margin" interest
rate. Businesses are already entitled to negotiate a higher interest rate in the contract or to include a higher rate in their commercial conditions. The current rules allow Member States to provide for a higher minimum "margin" rate in their national legislation.
Efficiency Doubtful: this option could strengthen the position of bigger or more powerful businesses since it would reinforce the bargaining position of firms that ask for a discount for early payment. Consistency Yes: trade-offs across other domains could not be identified.
5.7. Option 3c (legislative): the abolition of the threshold
The positive side of the repeal of the possibility that claims for interest of less than 5 could be excluded would certainly clear a hurdle for claiming interests for late payments, in particular for SMEs. If, for example, the interest rate I is 11% per annum non compounded and the amount A owed is 1,000 Euros, the number of days overdue N before the creditor can claim interest is, according to the current rules: N = 5 x 365 / (A x I) = 17 (16.59) days. By repealing this threshold, this creditor could seek interest for late payments 16 days earlier than nowadays in this case. The higher the amount, the shorter this period will be. If one assumes that SME's are more likely to invoice smaller amounts than major companies, this threshold would hit SME's first. This option is particularly effective for claiming interest for late payment in smaller transactions where interest amounts to only a small sum.
On the negative side, it is fair to assume that this option, if adopted independently from any other measure, is unlikely to encourage creditors to seek the payment of interests of less than 5. The cost of establishing the invoice charging the interest will be higher than the amount of the interest, thus making it uneconomical to collect. It is therefore doubtful whether this option would have any effect on a standalone basis.
70 Wilson N., "An Investigation into Payment Trends and Behaviour in the UK: 1997-2007", Department for Business, Enterprise & Regulatory Reform and CMRC, 2008.
Although this option would not have any negative impact on creditors, its impact on debtors may not be clearly perceivable. The abolition of the threshold could have a pedagogic effect but would be unlikely to result into short-term attitude changes. More importantly, debtors know that only very few creditors will start court proceedings for such an amount of less that 5 so that some debtors could simply decide to disregard this invoice and fail to pay the interests. One should also keep in mind that it is not excluded that, in practice, larger companies would benefit proportionally more than smaller companies from this option, since they are often in a better position to charge interest than smaller operators, given the differences in buyer/supply power in the supply chain.
Table 1.23: Summary of impacts of option 3c
Effectiveness Yes for small transactions if accompanied by other measures that would make it economical to collect the outstanding amounts.. Efficiency Yes, especially for SMEs. No budgetary, transaction and compliance costs could be identified. Consistency Yes: trade-offs across other domains could be identified.
5.8. Option 3d (legislative): the introduction of a "Late Payment Fee" As its stands, the transaction costs for charging interest by means of an invoice can hardly be recovered:
Table 1.24: Provisions for recovery costs in Member States
The losing party in a court case will be responsible for the legal costs of court action,
Austria including the fees of lawyers as determined by the " Rechtsanwaltstarifgesetz".
The losing party in a court case will be responsible for the legal costs of court action, including the fees of lawyers within the limits laid down by the law of 21 April 2007 and the royal decree of 26 October 2007.
Belgium
Costs for legal representation paid as a lump sum (usually according to value of suit). Hourly fees of lawyers paid in full in high value cases, but if low value, full costs may not be awarded
Czech Republic
All recovery costs up to 15% of the amount of the debt if debt exceeds 30,000. If it is less than 30,000, maximum is the value of the debt
Spain
Judges decide on recovery costs and creditors can claim all. However, debtors will pay maximum of 192 to 302 depending on size and nature of debt (This limit can be set aside in exceptional circumstances). Median amount awarded in 2005 was 220
Finland
If the debt is less than 1,000, recovery payment is 40. If less than 10,000 the amount is 70 and if more than 10,000 it rises to 100. However, the amount of recovery costs in cases of late payment must be stated in the contract
Ireland
Malta Reasonable compensation costs can be recovered for all recovery costs
Compensation costs of £40 are payable on debts of less than £1,000, £70 on debts of less than £10,000 and £100 for debts of more than £10,000
United Kingdom
As a general rule, the loser in a court case will be responsible for the legal costs of court action, but the judge decides whether out-of-court costs and the fees of lawyers can be claimed.
Germany
Poland Losing party pays costs in legal cases which can vary from 25 to 25,000
Judges rarely award costs over and above court costs. Debts of more than 3,740 require representation by a lawyer
Portugal
Sweden All recovery costs can be claimed but maximum payable is 100
France Recovery costs are only payable as a result of court proceedings
Slovakia Reasonable compensation is payable for all relevant recovery costs
The purpose of the "Late Payment Fee" would be to provide an instant deterrent to the debtor and an incentive on the part of the creditor to claim interest, if it is assumed the fee will exceed any costs (e.g. invoicing, accounting and administration costs) placed on the creditor when charging interest. Setting the correct fee is important in this respect, if the effectiveness of the measure is to be maximised. A fixed fee charged on a relatively small debt is proportionally going to have a much larger impact than in relation to much larger transactions.
The principal advantage of this option is that it would permit businesses to recover the transaction costs of charging interest for late payments so that only purely commercial arguments would prevent creditors from charging interest. Under this option, the cost of creating the invoice charging the interest would be recovered together with the amount of the interest, so that it becomes economical to collect interest. These costs are redistributive in nature
71
.
Assuming that the cost C of sending reminder or dunning letters to a debtor is 20 Euros (including special tracking postage/return receipt letter, labour cost, equipment etc), that the interest rate I is 11% per annum non compounded and that the debt amount A is 1,000, the number of days N before an overdue payment starts to compensate a creditor is currently: N = C x 365 / (A x I) = 67 (66.36) days. As its stands, only after 67 days of overdue payment it becomes economically interesting to apply the current legal provisions on late payment. Under this option, the creditor would not have to wait until it becomes economically interesting to charge interests. He would have an immediate incentive to charge interest for a late payment as the administrative burden and the cost of invoicing the client would not be higher than the compensation provided by the law. More than 69% of the IPM respondents are in favour of this fee.
For many smaller transactions, interest amounts to only a small sum, thus the making it uneconomical to collect, particularly when the risk of damaging a business relationship is considered. A larger fixed fee would be a more effective instrument for companies dealing in smaller transactions. A fixed amount may therefore compensate a business for the administrative cost related with late payment, but to the competitive advantage of SMEs dealing in smaller transactions. Debt collection agencies and other third parties dealing with debt collection as well as factoring agencies would benefit from this option.
This option could give raise to some minor adjustment cost for businesses working with pre-printed invoices. Since the "Late Payment Fee" would be optional and businesses would not be obliged to amend their general commercial conditions, one may assume that the adjustment costs would be recovered very quickly.
Table 1.25: Summary of impacts of option 3d
Effectiveness Yes: it would permit businesses to recover the transaction costs of charging interest for late payments so that only purely commercial arguments would prevent creditors from charging interest. Efficiency Yes. Costs (mainly transaction costs) are redistributive. No budgetary or compliance costs. Consistency Yes: trade-offs across other domains could not be identified.
71 See Table 3.19 in Annex 3.
5.9. Option 3e (legislative): the introduction of a "Late Payment Compensation"
The alternative to the previous option is a fixed financial compensation of 1% of the outstanding amount for the recovery costs related to late payment. This compensation would also be cumulated with the interests for late payment and could even be increased in case of substantial delays. The advantage of this option is its strong deterrent effect on debtors proportional to the size of the claim. The compensation costs incurred by the debtor for paying late in all circumstances would exceed the savings that he would otherwise obtain from free trade-credit. It could encourage the use of debt collection agencies, factoring agencies and other third parties dealing with debt collection since businesses would be able to recover part of the commission or fees to be paid to these agencies and other third parties..
One of the drawbacks is the fact that, for many smaller transactions, a compensation of 1% amounts to only a small sum, thus the making it uneconomical to collect, particularly when the risk of damaging a business relationship is considered. In addition, larger companies benefit proportionally more than smaller companies from a "Late Payment Compensation" as they can obtain lower interest rates on loans from financial institutions than SMEs and are often in a better position to charge interest than smaller operators, given the differences in buyer/supply power in the supply chain. A flat rate may therefore compensate the company for late payment, but to the competitive disadvantage of SMEs that are dealing in smaller transactions.
This option could give rise to some minor adjustment cost for businesses working with pre-printed invoices.
Table 1.26: Summary of impacts of option 3e
Effectiveness Yes: strong deterrent effect on debtors proportional to the size of the claim since the costs incurred by the debtor would exceed the savings that he would otherwise obtain from free trade-credit. Efficiency Yes. Costs (mainly transaction costs) are redistributive. No budgetary or compliance costs. Consistency Yes: trade-offs across other domains could not be identified.
5.10. Option 3f (legislative): Extending the role of representing organisations
Several Member States reserve certain legal activities to a particular legal profession, for example the provision of legal advice (reserved to lawyers)
72
. In particular,
according to Council Directive 77/249/EEC to facilitate the effective exercise by lawyers of the freedom to provide services, judicial activities and representing clients before public authorities should be pursued in any given Member State under the obligations laid down for lawyers established in that State. However, this provision only applies to cross-border activities by lawyers as defined in the Directive. Consequently, it does not apply to representative organizations. Moreover, organisations representing SMEs do not represent clients but only their members so that, unlike lawyers, they do not operate in a competitive environment. In addition, representation by a lawyer or another legal professional is not mandatory for claimants within the framework of Regulation (EC) No 861/2007 establishing a
72 For an overview, see http://ec.europa.eu/civiljustice/case_to_court/case_to_court_ec_en.htm .
European Small Claims Procedure and Regulation (EC) No 1896/2006 creating a European order for payment procedure.
The advantage of this option is that smaller businesses with insufficient resources would neither have to bear the cost and financial risks of bringing an action nor spend management time on chasing the late payment. It could be helpful for enterprises having insufficient resources to take action against the debtor or lacking the knowledge how to calculate late payment interest. It would also improve access to justice for smaller businesses for which litigation for late payment constitutes a major hurdle. Moreover, the mere possibility of having to face litigation could encourage debtors to pay smaller creditors within the agreed or legal deadline.
This option presupposes that measures are taken to reduce the cost of bringing an action and the associated financial risks. Any action taken by a representative organisation involves administrative costs in preparing the file, court fees, possibly lawyers' fees and, if the action is brought in another Member State, translation costs. Therefore, the impact of this option depends to a large extent on the implementation of options 3c, 3d and 3e.
This negative side of this option is the lack of effectiveness. The problem of insufficient resources would, at least partly, be shifted to organisations representing SMEs which may not have the human or financial resources to cope with the administrative charges and the financial risks of litigation on late payment. A representative organisation may not have the resources to simultaneously handle several actions related to distinct late payment cases and may decide to prioritise its action. A very important stumbling block is that the organisation may be prevented from bringing an action because of an internal conflict of interest, for example when a business association has as members both the creditors and the debtor. Finally, it is possible that the interests of certain groups of businesses are not represented by any organisation (e.g. SMEs active in a new market with no trade association).
Table 1.27: Summary of impacts of option 3f
Effectiveness Doubtful: these organisations may not have the resources to cope with the administrative charges and the financial risks of litigation on late payment. They may also be prevented from bringing an action because of a conflict of interest, for example when the organisation has as members both the creditors and the debtor. Efficiency Yes if measures are taken to reduce the cost of bringing an action and the associated financial risks (options 3c, 3d and 3e). Consistency Yes: trade-offs across other domains could not be identified.
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6.C OMPARING THE OPTIONS 6.1. General comparison
Considering the availability of several forms of intervention, comparison of the options should concentrate on those limiting the EU institutions' involvement to what is necessary to achieve the objectives of the Treaties. The form of Community action should be as simple as possible, consistent with satisfactory achievement of the objective of the measure and the need for effective enforcement.
It is also important to keep in mind that the current rules (baseline option) do not aim at full harmonisation of national laws but at compliance with some minimum
requirements that apply across the EU. With the exception of option 3a, businesses are not obliged to apply these rules and to claim their rights. Whether they do depends above all on the commercial and financial strategy of each of the operators concerned in the light of the economic conditions in the various markets. In addition, Member States and enterprises may lay down more stringent provisions. This combination creates an important element of uncertainty about the take-up by economic operators of any of the options except 3a.
Assessment of the results of this comparison of the policy options with respect to the baseline option in terms of their effectiveness
73 74 75
, efficiency and consistency shows the following results:
Table 1.28: General comparison of options in terms of effectiveness, efficiency and consistency
Option Effectiveness Efficiency Consistency
Option 2a (nonlegislative): The organisation of awarenessraising activities targeted No: no impact on No: requires too many resources for a very uncertain result. Yes: trade-offs across other domains could not be identified. debtors and minimal impact on creditors
at
businesses
Option 2b No: objectives are Yes: fairly low Yes: trade-offs across other domains could not be identified. (nonlegislative): The organisation of awarenessraising activities targeted unlikely to be achieved. budgetary cost for the EU. No other costs. at
organisations representing SMEs
Option 2c (nonlegislative): Publication Doubtful: possible No: very high Yes: trade-offs across other domains could not be identified. preventive effect on administrative costs for businesses. of creditors but many information on bad debtors practical drawbacks for its implementation
Option 3a/1 Yes: likely to lead to less late payments No: Considerable No: loss of contractual freedom by removing the ability of companies to (legislative): Harmonisation of compliance and adjustment costs.
payment compete through
periods between businesses payment periods offered to clients. This could in turn put more pressure on other aspects of contract negotiation
where larger companies can
still exercise
significant influence
over small company
73 The extent to which options can be expected to achieve the objectives of the proposal.
74 The extent to which objectives can be achieved for a given level of resources/at least cost (costeffectiveness). 75 The extent to which options are likely to limit trade-offs across the economic, social, and environmental domain.
suppliers
Option 3a/2 Yes: fear of damaging the Yes: budgetary impact for national authorities would Yes: trade-offs across other domains could not be identified. (legislative): Harmonisation of periods for payment commercial
relationship with the remain fairly
client should not exist in contracts concluded with national limited compared with the additional liquidity that earlier payment by public authorities would generate for businesses. by
public authorities authorities.
to Moreover, the payment period is normally not a negotiable item of a contract awarded by a public businesses
authority.
However, a sufficiently high sanction in case of late payment needs to be foreseen.
Option 3b Doubtful: stakeholders seem to be satisfied with the Doubtful: this option could Yes: trade-offs across other domains could not be identified. (legislative): increasing strengthen the
the current "margin" position of bigger or more
"margin" interest rate interest rate. Businesses are already entitled to negotiate powerful businesses since it would reinforce the bargaining position of firms that ask for a discount for early payment.
a higher
interest rate in the contract or to include a higher rate in their commercial conditions. The current rules allow Member
States to
provide for a higher minimum "margin" rate in
their national legislation.
Option 3c Yes for small Yes, especially for Yes: trade-offs across other domains could not be identified. (legislative): the abolition of the 5 threshold transactions if SMEs. No budgetary, transaction accompanied by other measures and
that would compliance costs could be identified. make it economical to collect the outstanding amounts.
Option 3d Yes: it would permit businesses to recover the transaction Yes. Costs (mainly Yes: trade-offs across other domains could not be identified. (legislative): the introduction of a "Late Payment Fee" transaction costs) are redistributive. costs of No
charging interest for late payments so that only purely budgetary or compliance costs. commercial
arguments would prevent creditors from charging interest.
Option 3e Yes: strong deterrent effect Yes. Costs (mainly Yes: trade-offs across other domains could not be identified. (legislative): the introduction of a "Late Payment Compensation" on debtors transaction costs) are redistributive. proportional to the size of the claim since the costs incurred by the debtor would exceed the savings that he would otherwise obtain from free trade-credit. No budgetary or compliance costs.
Option 3f Doubtful: these Yes if measures are taken to reduce the cost of bringing an action and Yes: trade-offs across other domains could not be identified. (legislative): Extending organisations may not have the resources to the
role of cope with the the associated financial risks (options 3c, 3d and 3e). representative organisations administrative charges and the financial risks of litigation
on late payment. They may also be
prevented from
bringing an action because of a conflict of interest,
for example
when the organisation has as members both the creditors and the debtor.
6.2. Ranking the options
The above impact analysis shows that, as regards B2B transactions, options 3a/2, 3c, 3d and 3e meet the criteria of effectiveness, efficiency and consistency. The other options fail in respect of at least one criterion:
Table 1.29: Ranking the options
Option Effectiveness Efficiency Consistency RECOMMENDED CHOICE
Option 3a/2 (legislative): Harmonisation of periods for payment by public authorities to businesses Yes Yes Yes Option 3e (legislative): the introduction of a "Late Payment Compensation" Yes Yes Yes Option 3c (legislative): the abolition of the 5 threshold Yes Yes Yes
Option 3d (legislative): the introduction of a "Late Payment Fee" Yes Yes Yes OPTIONS WHICH ARE NOT RECOMMENDED
Option 3b (legislative): increasing the "margin" interest rate Doubtful Doubtful Yes
Option 3f (legislative): Extending the role of representative organisations Doubtful Yes Yes Option 3a/1 (legislative): Harmonisation of payment periods between businesses Yes No No
Option 2a (non-legislative): The No No Yes organisation of awareness raising activities targeted at businesses
Option 2b (non-legislative): The No Yes Yes organisation of awareness raising
activities targeted at organisations representing SMEs
Option 2c (non-legislative): Publication of information on bad debtors Doubtful No Yes
Considering that none of the options is mutually exclusive and that their optional nature for businesses allows them to choose the most appropriate tool in the light of the late payment at hand, it is suggested that options 3a/2, 3c, 3d and 3e be taken together as a single package of measures.
6.3. Administrative cost 76
The only option likely to impose significant administrative costs on business is option 2c. A rough indication of these costs can be found in table 1.16.
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7.M ONITORING AND EVALUATION
The organisation of a reliable monitoring and evaluation scheme for the combination of options 3a/2, 3c, 3d and 3e is complicated by the principle that the rules laid down in the Directive should not have a compulsory effect on businesses, i.e. businesses should not be obliged to apply these rules and to claim their rights. In addition, evidence suggests that a negative economic cycle is likely to negatively influence timely payment as it affects companies' cash flows and funding opportunities
77
.
During a period of economic growth, enterprises benefit from better cash inflow which, at least partly, can be used for paying more promptly.
Nevertheless, monitoring and evaluation could be organised primarily by reference to the information and data set out in annexes 1, 2 and 3 (partly) which could be used as indicators for the achievement of the objectives. The organisation of new, similar surveys is recommended to compare the behaviour of creditors before and after implementation of the options.
Furthermore, Member States would play a stronger role in the implementation of the directive if options 3a/2, 3c, 3d and 3e were to be retained. National authorities could provide information on the implementation of these options in a report that would be sent to the Commission at three-year intervals.
76 Administrative costs are defined as the costs incurred by enterprises, the voluntary sector, public authorities and citizens in meeting legal obligations to provide information on their action or production, either to public authorities or to private parties.
77 See for example Baum C, Caglayan M. and Ozkan N., "The Impact of Macroeconomic Uncertainty on Trade Credit for Non-Financial Firms", Boston College, Economics Department, Working Papers in Economics, 2003; Lovea I, Preveb L. and Sarria-Allende V., "Trade credit and bank credit: Evidence from recent financial crises", Journal of Financial Economics, Volume 83, Issue 2, February 2007, pages 453-469; Bossay F., "Credit chains and the propagation of financial distress", ECB Working Paper No 573, January 2006.
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8.A NNEXES
8.1. Annex 1: Results of the I.P.M. consultation of interested parties Consultation from 29 May 2008 to 31 August 2008 on Your Voice on Europa. 510 Responses were received.
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a)Identity
1a. Are you replying as a: single choice reply Number of Requested records % of total requested records (510) number records (510)
Company 361 70.8% 70.8%
Representative organisation 83 16.3% 16.3% Other interested party 59 11.6% 11.6% Public authority 7 1.4% 1.4%
1b. What is the size of your company (number of employees)? single choice reply Number of Requested records % of total requested records (361) number records (510)
0 9 134 37.1% 26.3% 10 49 101 28% 19.8
50 249 64 17.7% 12.5% 250+ 62 17.2% 12.2%
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2.What is your country of residence? single choice reply Number of Requested % of total requested records number records 510) records (510)
Italy 81 15.9% 15.9%
Germany 77 15.1% 15.1%
United Kingdom 76 14.9% 14.9% Greece 56 11% 11%
Belgium 53 10.4% 10.4% Portugal 35 6.9% 6.9% Spain 25 4.9% 4.9%
Ireland 20 3.9% 3.9% Austria 14 2.7% 2.7% France 13 2.5% 2.5% Cyprus 13 2.5% 2.5% Other 12 2.4% 2.4%
Czech Republic 7 1.4% 1.4% Netherlands 7 1.4% 1.4% Sweden 5 1% 1%
Denmark 4 0.8% 0.8% Poland 3 0.6% 0.6%
Finland 3 0.6% 0.6%
Bulgaria 2 0.4% 0.4% Slovenia 2 0.4% 0.4% Hungary 1 0.2% 0.2% Malta 1 0.2% 0.2% Estonia 0 0% 0% Latvia 0 0% 0%
Lithuania 0 0% 0%
Luxembourg 0 0% 0% Romania 0 0% 0%
Slovakia 0 0% 0% b) Problems and effects
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3.Have you experienced problems with other businesses paying you later than you require in your normal terms of business? single choice reply Number of Requested % of total requested records number records (361) records (510)
Seldom (1-25% of your invoices to other businesses) 112 31% 22%
Quite often (26-50% of your invoices to other businesses) 93 25.8% 18.2% Often (51%-75% of your invoices to other businesses) 85 23.5% 16.7%
Very often (more than 75% of your invoices to other businesses) 62 17.2% 12.2% Never 9 2.5% 1.8%
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4.Have you experienced problems with public authorities paying you later than you require them to in your normal terms of business? single choice reply Number of Requested % of total requested records number records (361) records (510)
Very often (more than 75% of your invoices to public authorities) 138 38.2% 27.1% Seldom (1-25% of your invoices to public authorities) 84 23.3% 16.5% Never 55 15.2% 10.8%
Often (51%-75% of your invoices to public authorities) 52 14.4% 10.2%
Quite often (26-50% of your invoices to public authorities) 32 8.9% 6.3%
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5.What has been the effect of late payment on your business? multiple choices reply Number of Requested % of total requested records number records (361) records (510)
It takes up too much management time and valuable working hours 239 66.2% 46.9% Our business needs bank credit 204 56.5% 40%
It slows down the growth of our business 182 50.4% 35.7% It has a negative effect on investment 136 37.7% 26.7%
It affects the productivity of the business 135 37.4% 26.5% It threatens the survival of our business 129 35.7% 25.3%
It discourages us from engaging in public procurement contracts 84 23.3% 16.5% It discourages us from engaging in cross-border transactions 29 8% 5.7% It does not really affect our business 27 7.5% 5.3% Other 6 1.7% 1.2%
Don't know 4 1.1% 0.8%
Does not apply 3 0.8% 0.6%
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6.What is your usual response in case of late payment? multiple choices reply Number of Requested % of total requested records number records (361) records (510)
We contact the client personally 307 85% 60.2%
Our business pays our creditors late in turn 109 30.2% 21.4% Our lawyers contact the client 94 26% 18.4%
We are patient and only react after a long time 84 23.3% 16.5% A debt collecting agency contacts the client 47 13% 9.2% Other 17 4.7% 3.3%
Does not apply 4 1.1% 0.8% Don't know 3 0.8% 0.6%
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c)Interest
7a. Do you claim interest for late payment? single choice reply Number of Requested % of total requested records number records (361) records (510)
Never 144 39.9% 28.2%
Seldom 123 34.1% 24.1%
Frequently 39 10.8% 7.6% Always 34 9.4% 6.7%
Very often 15 4.2% 2.9% Don't know 6 1.7% 1.2%
7b. Why do you never claim interest? multiple choices reply Number of Requested % of total requested records number records (144) records (361)
Out of fear that the customer would be lost 84 58.3% 23.3% It is too complicated to claim interest 69 47.9% 19.1%
Competitors never claim interest for late payments 54 37.5% 15%
Unawareness of the right to charge interest for late payment 17 11.8% 4.7% The interest rate is unknown 11 7.6% 3%
Interest is considered as taxable revenue 7 4.9% 1.9% Don't know 5 3.5% 1.4%
7c. Why do you seldom claim interest? multiple choices reply Number of Requested % of total requested records number records (123) records (361)
Out of fear that the customer would be lost 85 69.1% 23.5% It is too complicated to claim interest 54 43.9% 15%
Competitors never claim interest for late payments 27 22% 7.5%
Unawareness of the right to charge interest for late payment 5 4.1% 1.4% Interest is considered as taxable revenue 4 3.3% 1.1% Don't know 4 3.3% 1.1%
The interest rate is unknown 3 2.4% 0.8%
8a. The laws on late payment in the EU currently specify that a creditor may claim an interest rate of approximately 11 % in case of late payment. In your view, is that interest rate reasonable and proportionate to encourage timely payment in commercial transactions? single choice reply Number of Requested % of total requested records number records (510) records (510)
Yes 301 59% 59%
No 172 33.7% 33.7%
Don't know 37 7.3% 7.3%
8b. If you think it is unreasonable or disproportionate, is it: single choice reply Number of Requested % of total requested records number records (510) records (510)
Too low 330 64.7% 64.7%
Too high 180 35.3% 35.3%
8c. What would be a more appropriate total interest rate for late payment? single choice reply Number of Requested % of total requested records number records (330) records (510)
12 to 14% 105 31.8% 20.6% 15 to 19% 92 27.9% 18%
20 to 24% 63 19.1% 12.4% No opinion 40 12.1% 7.8%
30% or higher 17 5.2% 3.3% 25 to 29% 13 3.9% 2.5%
8d. What would be a more appropriate total interest rate for late payment? single choice reply Number of Requested % of total requested records number records (180) records (510)
10% 65 36.1% 12.7% 8% 35 19.4% 6.9%
7% or lower 35 19.4% 6.9% No Opinion 27 15% 5.3% 9% 18 10% 3.5%
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9.Do you apply the interest rate of 11 % for late payment in your general commercial and payment conditions? single choice reply Number of Requested % of total requested records number records (361) records (510)
No, I don't apply an interest rate at all 204 56.5% 40% Yes 74 20.5% 14.5%
No, I apply another interest rate. 64 17.7% 12.5% Don't know 19 5.3% 3.7%
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10.During the last 5 years, did you sign a contract (providing services and/or goods) in which the other party refused to insert a clause on interest for late payment, or which specified an interest rate lower than 11%? single choice reply Number of Requested % of total requested records number records (361) records (510)
Never 144 39.9% 28.2% Seldom 64 17.7% 12.5%
Don't know 57 15.8% 11.2% Very often 54 15% 10.6%
Frequently 42 11.6% 8.2%
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d)Action
-
11.An idea is to introduce in the European Union a "late payment fee", i.e. an automatic minimum amount based on the size of the debt, in addition to an interest rate of approximately 11%. Do you think such a 'late payment fee' would be useful? single choice reply Number of Requested % of total requested records number records (510) records (510)
Yes 251 49.2% 49.2%
Yes, but only as an alternative to the interest rate for late payment 103 20.2% 20.2% No, current rules are sufficient 78 15.3% 15.3%
No, an increase of the interest rate would be more efficient 53 10.4% 10.4% Don't know 25 4.9% 4.9%
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12.Sometimes major companies systematically refuse to pay the full amount for reasons not envisaged in the contract or they systematically pay well after the deadline in the invoice. Do you think it would be useful if organisations representing SMEs were entitled to take action on behalf of the SME before a case is referred to court (e.g. mediation) or during court proceedings? single choice reply Number of Requested % of total requested records number records (510) records (510)
Yes 374 73.3% 73.3% No 79 15.5% 15.5%
No opinion 57 11.2% 11.2%
13a. Interest for late payment is only due after the contractually agreed payment period. Do you think that a maximum period for making payments between businesses or between businesses and public authorities fixed at European level would be useful? single choice reply Number of Requested % of total requested records number records (510) records (510)
Yes 407 79.8% 79.8% No 103 20.2% 20.2%
13b. Why do you not consider such an EU maximum period useful? multiple choices reply Number of Requested % of total requested records number records (103) records (510)
Contractual freedom of businesses should not be restricted or regulated 72 69.9% 14.1%
It is impossible to provide for a maximum period that would fit all enterprises 63 61.2% 12.4% It is much better to provide for efficient sanctions 20 19.4% 3.9% Other 0 0% 0%
13c. How long should that maximum period be? single choice reply Number of Requested % of total requested records number records (407) records (510)
30 days 206 50.6% 40.4% 45 days 106 26% 20.8% 20 days 69 17% 13.5% Other 26 6.4% 5.1%
14a. Is it necessary to provide for a specific regime favouring micro and small enterprises in case of late payment? single choice reply Number of Requested % of total requested records number records (510) records (510)
Yes 288 56.5% 56.5% No 143 28% 28%
Don't know 79 15.5% 15.5%
14b. What kind of measures should such a regime include? 1) Fixing a much higher interest rate for late payment to SMEs than the one fixed in the laws on late payment in the EU single choice reply
Number of Requested % of total requested records number records (288) records (510)
Yes 168 58.3% 32.9% No 82 28.5% 16.1%
Don't know 38 13.2% 7.5%
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2)Enable representative organisations to take action in name of a business single choice reply Number of Requested % of total requested records number records (288) records (510)
Yes 222 77.1% 43.5% No 36 12.5% 7.1%
Don't know 30 10.4% 5.9%
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3)Labelling systematic late payment to SMEs as an unfair business practice single choice reply Number of Requested % of total requested records number records (288) records (510)
Yes 241 83.7% 47.3%
Don't know 29 10.1% 5.7% No 18 6.2% 3.5%
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4)Other measure single choice reply Number of Requested % of total requested records number records (288) records (510)
Don't know 148 51.4% 29% Yes 89 30.9% 17.5% No 51 17.7% 10%
8.2. Annex 2: Results of the EBTP consultation of interested parties Consultation from 13 May 2008 till 20 June 2008 - 408 responses
Table 2.1: Number of employees in your company
0 4,9%
1-9 22,5%
10-49 24,3%
50-249 21,8% 250-499 7,6% 500 + 18,9%
Table 2.2: Main sector of activity
C - Mining/Quarrying 1,5% D Manufacturing 24,3%
E - Electricity, gas and water supply 3,9% F Construction 7,4%
G - Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods 13,5% H - Hotels, restaurants and bars 2,7%
I - Transport, storage and communication 12,7% J - Financial intermediation 7,6%
K - Real estate, renting and business activities 15,7% N - Health and social work 2,5%
O - Other community, social and personal service activities 8,3%
Table 2.3: Apart from your country, in how many countries of the European Union do you
regularly sell products and services?
None 41,2% 1 9,1%
2-3 17,4% 4-5 8,8%
more than 5 23,5%
Table 2.4: EBTP respondents having a problem with other businesses paying later than they
require them to in your normal terms of business
Seldom (1-25% of your invoices to other businesses) 42.3%
Frequently (26-50% of your invoices to other businesses) 27.9% Often (51%-75% of your invoices to other businesses) 15.7%
Very often (more than 75% of your invoices to other businesses) 11.2% Never 1.9%
Does not apply 1.1%
Table 2.5: EBTP respondents having a problem with public authorities paying later than they
require them to in your normal terms of business
Seldom (1-25% of your invoices to public authorities) 36.2% Does not apply 21.0%
Frequently (26-50% of your invoices to public authorities) 12.8%
Very often (more than 75% of your invoices to public authorities) 12.5% Often (51%-75% of your invoices to public authorities) 9.0% Never 8.5%
Table 2.6: What has been the effect of late payment on your business? (Tick all that apply)
It takes up too much management time and valuable working hours 67.0% Our business needs a bank credit 38.3%
It slows down the growth of our business 31.4%
It affects the productivity of the business 28.7% It has a negative effect on investment 22.9% It does not really affect our business 18.4%
It threatens the survival of our business 13.6%
Discourages from engaging in public procurement contracts 13.0% It discourages from engaging in cross-border transactions 7.4% Does not apply 3.7% Other 1.9%
Don't know 0.3%
Table 2.7: What is your usual response in case of late payment? (Tick all that apply)
We contact the client personally 87.5%
Our business pays late in turn to our creditors 22.9% Our lawyers contact the client 22.3%
A debt collecting agency contacts the client 17.3%
We stay patient and only react after a long time 16.0% Other 4.5%
Does not apply 2.1% Don't know 0%
Table 2.8: Do you claim interest for late payment?
Seldom 44.7% Never 29.5%
Frequently 10.9% Very often 7.2% Always 6.9%
Don't know 0.8%
Table 2.9: Why do you seldom claim interest? (Tick all that apply)
Out of fear that the customer would be lost 60.1% It is too complicated to claim interest 45.2%
Competitors never claim interest for late payments 23.8%
Late interest is considered as revenue, even when it is not paid 14.9% The interest rate is unknown 4.2%
Unawareness about the right to charge interest for late payment 4.2% Don't know 0.6%
Table 2.10: Why do you never claim interest? (Tick all that apply)
Out of fear that the customer would be lost 68.5% It is too complicated to claim interest 45.9%
Competitors never claim interest for late payments 28.8%
Late interest is considered as revenue, even when it is paid 13.5%
Unawareness about the right to charge interest for late payment 13.5% The interest rate is unknown 7.2% Don't know 5.4%
Table 2.11: The laws on late payment in the EU specify that a creditor may claim an interest rate
of currently approximately 11 % in case of late payment. In your view, is that interest rate
reasonable and proportionate to encourage timely payment of your invoices?
Yes 61.4% No 25.0%
Don't know 13.6%
Table 2.12: Is this interest rate
Too low 68.1%
Too high 31.9%
Table 2.13: What would be a more appropriate total interest rate for late payment?
7% or lower 73.3% 8% 13.3% 10% 6.7% 9% 3.3%
No opinion 3.3%
Table 2.14: What would be a more appropriate interest rate?
15 to 19 % 35.9% 20 to 24% 26.6%
30 % or higher 23.4% 25 to 29% 7.8% 12 to 14 % 4.7% No opinion 1.6%
Table 2.15: Do you apply the interest rate of 11 % for late payment in your general commercial
and payment conditions?
No, I don't apply an interest rate at all. 42.8% No, I apply another interest rate. 30.1% Yes 20.2%
Don't know 6.9%
Table 2.16: An idea is to introduce in the European Union a "late payment fee", i.e. an automatic
minimum amount based on the size of the debt, in addition to an interest rate of approximately
11%. Do you think such a 'late payment fee' would be useful?
Yes 35.4%
No, current rules are sufficient 21.3%
Yes, but only as an alternative to the interest rate for late payment 18.9% No, an increase of the interest rate would be more efficient 12.5% Don't know 12.0%
Table 2.17: Were you obliged, during the last 5 years, to sign a contract (providing services
and/or goods) in which the other party refused to insert a clause on interest for late payment, or
which specified an interest rate lower than 11%?
Never 43.6%
Seldom 23.1%
Frequently 13.8% Don't know 12.0% Very often 7.4%
Table 2.18: It happens that major companies grant themselves a discount on the price by
systematically refusing to pay the full amount for reasons that were not envisaged in the contract.
Do you think it would be useful if organisations representing SMEs were entitled to take action on
behalf of the SME before a case is handled in court (e.g. intermediation) or during the court case?
Yes 64.1% No 18.1%
No opinion 17.8%
Table 2.19: Practices occur whereby companies or national authorities systematically pay well
after the deadline in the invoice. Do you think it would be useful if organisations representing
SMEs could take action on behalf of the SME before a case is handled in court (e.g.
intermediation) or during the court case?
Yes 71.8% No 16.2%
No opinion 12.0%
Table 2.20: Interest for late payment is only due after the contractually agreed payment period.
Do you think that a maximum period for making payments between businesses or between public
authorities and businesses fixed at European level would be useful?
Yes 67.6% No 32.4%
Table 2.21: What should, in your view, the maximum period be, taking into account the payments
your company receives and pays itself?
30 days 53.5% 45 days 20.1% 20 days 16.1% Other 10.2%
Table 2.22: Why do you not consider such an EU maximum period useful? (Tick all that apply)
Contractual freedom of businesses should not be restricted or regulated 73.0%
It is impossible to provide for a maximum period that would fit all enterprises 54.9% It is much better to provide for efficient sanctions 23.0% Other 4.9%
Table 2.23: Is it necessary to provide for a specific and more favourable regime for micro and
small enterprises in case of late payment?
Yes 47.6% No 35.6%
Don't know 16.8%
Table 2.24: What kind of measures should such a regime include?
-
1)Fixing a much higher interest rate for late payment to SMEs than the one fixed in the laws on late payment in the EU
No 50.3%
Yes 40.2%
Don't know 9.5%
-
2)Enable representative organisations to take action in name of a business
Yes 76.5% No 14.5%
Don't know 8.9%
-
3)Labelling systematic late payment to SMEs as an unfair business practice
Yes 88.8% No 8.9%
Don't know 2.2% 4) Other measure
Don't know 23.5% Yes 17.3% No 6.7%
8.3. Annex 3: The causes and the size of the problem: facts and figures Table 3.1: Assertions on the causes of late payment
There are a range and complexity of motives for businesses both extending and receiving trade credit. Therefore, late payment is likely to derive from multiple and often complex causes. In the diagram below, the main themes associated with likely causes of late payments are summarised.
-
1.The Market Structure: The `popular' view of the causes of late payment asserted that business customers that have a dominant position in the market vis-à-vis suppliers are able to leverage their own cash-flow and profits by taking extended trade credit from the supply-base. Clearly this behaviour is more likely in market structures where there exist dominant buyers with very competitive supply chains. The buyer has bargaining power arising from its ability to select from a range of potential suppliers and is able to dictate the credit terms/periods from suppliers and/or take extended credit (pay late) when it is advantageous to do so without fear of a loss of supply. Bargaining may manifest itself by the buyer insisting on longer credit periods than the supplier might wish to extend and/or discounts on the invoice values. Moreover, buyers with bargaining power may insist on high standards of delivery, after-sales service and invoicing providing much scope for disputing invoices and, in consequence, extending the credit period. Bargaining power occurs where the buyer is a large company and the supply-chain is composed of many small competitive businesses or where the market structure is one of imperfect competition. However dominance is not necessarily a function of the relative sizes of businesses. There are many other types of customer-supplier relationships where the customer may have a strong bargaining position relative to the supplier related to product type rather than size of order/business. For instance a supplier is vulnerable if the nature of the product/service being supplied involves investing a lot of time and effort in securing a sale with a customer (specific investment) and/or needs repeat business to make the relationship profitable. Industry where there are contractors and subcontractors (e.g. construction sector; software and IT provision) appear to be bedevilled by late payment problems. Typically a contractor waits to be paid before being in a position to pay subcontractors. In the latter case both the market structure and the complex nature of the product/service precipitate the late payment problem. [...] Of course, small businesses with low profit margins are more sensitive to late payments and its impact on cash-flow than larger more profitable companies.
-
2.One could assert that late payment is a function of poor business and credit management practice. Where there is scope for disputing the quality of the supplier's products/services, aftersales service then the customer is likely to do so and withhold payment until satisfied. This may be perceived as valid practice by the customer but as late payment by the supplier. A particular issue surrounds credit management practice and the establishment of the terms of trade prior to the sale. As will be demonstrated later many small businesses extend credit to customers without establishing the credit terms in advance with the customer or without even specifying a payment date. Clearly this gives rise to possible disputes surrounding the due date and precipitates uncertainty about the timing of cash-inflows. Good credit management practice would ensure that credit terms, credit limits and credit periods are clearly established with the customer prior to any trade and that goods or services and invoices are supplied as pre-agreed. The supplier should endeavour to credit check the customer and establish the financial health, risk and creditworthiness of the customer. Disputes should be identified and resolved quickly and `excuses' for payment delays minimised or eliminated. Should late payment still arise then it is likely that the customer is itself inefficient, acting strategically and/or is in some unanticipated (short or long term) financial difficulty. Of course, the risks of doing business dictate that the supplier cannot anticipate all eventualities but should take all reasonable steps to minimise payment risks. Unfortunately when a supplier makes the `lending decision' to supply to a customer on trade credit terms it is difficult to ascertain how much trade credit the customer has received from other suppliers at any point in time and therefore establish whether the customer will have enough cash to repay on the due date. Moreover, customers that do not manage their own working capital well may not always have cash resources available to pay creditors as debt fall due. Indeed financial and working capital practice (or lack of) has often been cited as being as major reason for late payments between businesses.
The reality of the competitive process is that businesses will establish and fail due to changes in technology, product innovations and management mistakes and inefficiencies. Businesses on the
path to failure will typically begin to struggle with cash-flow and financing and the servicing of debt. Often trade creditors will not be a priority in the pecking order of creditors as the business attempts to stay afloat. Firms in financial difficulty often stretch their creditors in order to alleviate cash-flow problems. Thus businesses in financial distress will be late payers and businesses that continue to supply will run the increased risk of slow or non-payment from these customers. Particularly, as alluded to above, if the customer has increased the amount of credit it has received from other trade suppliers. Moreover it can often be the case that a business will fail quickly without showing obvious signs of financial distress and the trade suppliers continues supplying on credit terms when the banks have started to withdraw funding.
-
3.Clearly the macro-economic climate will have a bearing on the number of business failures as the economy moves through cycles. Likewise we would expect to see late payments and bad debts increasing as the economy moves into a through recession. Subsets of small businesses that overtrade as the economy moves into growth are potential late payers.
-
4.Access to finance: A further assertion has been that small and growing businesses can get into difficulties with cash-flow and payment when they have difficulty raising institutional and bank finance. Businesses that are undercapitalised or inappropriately financed have a constant battle with cash-flow. CMRC [Credit Management Research Centre, Leeds University Business School] research identified that small, growing businesses and particularly those that service export markets can be periodically starved of cash and struggle to pay creditors. In an empirical study of the demand for trade credit by small UK firms, CMRC found strong evidence of a financing demand for trade credit. The paper surmised that small firms, which pay trade credit liabilities late, appear to do so when they have reached their limit on short-term bank finance. These 'credit rationed' firms were typically growing and export oriented.
Source: Wilson N., "An Investigation into Payment Trends and Behaviour in the UK: 1997-2007", Department for Business, Enterprise & Regulatory Reform and CMRC, 2008. See http://berr.ecgroup.net/Publications/BetterBusinessFramework/Finance.aspx
Assertions: Causes of Late Payment
Competition and Bargaining Power
Management and Customer Service
Market Structure
-
-Financial management practice - Credit management practice - Product and Service Quality - After-sales service
-
-Imperfect competition - Bargaining power - Dominant Buyers/competitive suppliers - `fair trading' - Sub-contracting - Competitive process
Macro and Financial Environment
Business Cycle and Monetary Conditions
Commercial and B2B Lending
-
-Flow of commercial finance/credit - Monetary policy - Flow and nature of credit information - Credit Rationing (transitory/ permanent) - Capital Structure (bank/ trade credit) Business Cycle Upturn/ Downturn Business Cycle Downturn - over-trading - under capitalised businesses - inappropriate financing - export growth/ finance - product life-cycles/ innovation - tight lending/ interest rates - financial distress and insolvency - creditors in the pecking order
78
Table 3.2: Evolution of payment periods for SMEs in 7 Member States (number of days - 2003-2007)
2003 2004 2005
Theoretical Actual Theoretical Actual Theoretical Actual Actual Actual Actual
payment deadline payment payment deadline payment payment deadline payment delay delay delay period period period
Germany 25 12 37 27 13 40 33 19 52 Belgium 44 23 67 42 16 58 42 20 62 Spain 78 10 88 82 9 91 54 13 67
France 53 15 68 52 15 67 52 13 65 Italy 74 19 93 70 16 86 74 27 101
Portugal 53 45 98 47 35 82 45 38 83 U.K. 36 18 54 35 10 45 33 18 51
2006 2007
Theoretical Actual payment Theoretical Actual payment Actual delay Actual delay
payment deadline period payment deadline period
Germany 32 13 45 27 15 42 Belgium 43 19 62 43 17 60 Spain 63 18 81 61 12 73
France 52 14 66 52 14 66 Italy 72 21 93 73 21 94
Portugal 56 38 94 61 38 99 U.K. 34 15 49 30 13 43 Source : Eurofactor, Baromètres 2006, 2007 and 2008
78 In this case, 3000 SMEs from 6 to 500 employees in 7 EU Member States, essentially involved in B2B transactions.
Table 3.3: Payment duration in Member States
Average payment term Average payment term Average payment Average payment in days in days duration in days duration in days B2B Public authorities B2B Public authorities
(2008) (2008) (2008) (2008) Belgium 37.0 49.0 50.0 75.0 Bulgaria -- -- -- --
Czech Republic 30.0 23.0 49.0 33.0 Denmark 29.4 27.5 35.5 35.8 Germany 30.0 25.0 36.0 40.0 Estonia 20.7 15.3 35.5 19.8 Ireland 39.1 36.4 57.5 50.7
Greece 84.0 95.0 110.0 157.0 Spain 73.0 103.0 89.0 144.0 France 49.0 57.0 65.0 71.0 Italy 68.0 95.0 88.0 135.0 Cyprus 67.2 55.4 95.8 72.4 Latvia 21.5 20.1 41.5 31.3
Lithuania 30.3 30.0 46.2 39.8 Luxembourg -- -- -- --
Hungary 26.0 30.0 45.0 55.0 Malta -- -- -- --
Netherlands 26.1 27.2 40.0 46.0 Austria 27.0 27.0 35.0 47.0 Poland 29.7 27.7 46.8 47.9
Portugal 47.1 57.4 80.1 137.8 Romania -- -- -- --
Slovenia -- -- -- --
Slovakia 31.0 28.0 39.0 35.0 Finland 21.0 20.0 27.0 24.0 Sweden 27.0 28.0 34.0 35.0
United Kingdom 33.2 30.0 51.0 48.0 Source : Intrum Justitia, European Payment Index 2008
Table 3.4: Which measures do you take to protect your company from bad debt?
Credit insurance (commercial) 30% Cash on delivery 3% Advance payment 17% Guarantees 4%
Active collection procedures (internal) 13% Retention of title 2% External collection services 11% Factoring 1%
Letter of Credit (ILC) 6% Attorney, Bailiff, lawyer 2% Credit check 4% Bill of exchange 1% Source : Atradius Payment Practices Barometer Winter 2007
Table 3.5: Payment delays in Member States
Average payment delay in Average payment delay in Average payment delay in days days days
B2B Public authorities B2B + Public authorities
(2008) (2008) (2007)
Belgium 13.0 26.0 15.3 Bulgaria -- -- --
Czech Republic 19.0 10.0 25.0 Denmark 6.1 8.3 7.2
Germany 16.0 15.0 15.5 Estonia 14.8 4.5 8.5
Ireland 18.4 14.3 14.3 Greece 26.0 62.0 27.4 Spain 16.0 41.0 15.2
France 16.0 14.0 14.3 Italy 20.0 40.0 23.9
Cyprus 28.6 17.0 32.4 Latvia 20.0 11.2 11.9
Lithuania 15.9 9.8 14.9 Luxembourg -- -- --
Hungary 19.0 25.0 16.3 Malta -- -- --
Netherlands 13.9 18.8 13.2 Austria 8.0 20.0 16.0 Poland 17.1 20.2 17.1
Portugal 33.0 80.4 39.9 Romania -- -- --
Slovenia -- -- --
Slovakia 8.0 7.0 20.1 Finland 6.0 4.0 6.0 Sweden 7.0 7.0 6.9
United Kingdom 17.8 18.0 17.6 Source : Intrum Justitia, European Payment Index 2008
Table 3.6: Payment delays in Member States
Average payment delays in Average payment delays in
days (2007) days (2007)
Belgium 16.2 Ireland 19.6
Germany 9.4 Netherlands 11.7 Spain 14.8 Portugal 24.1
France 12.2 United Kingdom 13.6 Italy 12.6 Source : Altares, Les comportements de paiement des enterprises en Europe, Bilan 2007
Table 3.7: Value of turnover paid late by Member States (m)
Turnover (m) Days Adjust- Adjustment factor Value turnover paid
delay ment for volume of late (m, rounded) factor turnover for days
SME Large SMEs Large SMEs Large delay
BE 175,534 129,806 13 0.81 0.04 0.04 32,507 20,616 CZ 57,706 42,674 19 1.19 0.01 0.01 15,619 9,906 DK 95,614 70,706 6 0.38 0.02 0.02 8,308 5,269
DE 949,861 702,419 16 1.00 0.19 0.19 216,497 137,306 EE 7,243 5,357 15 0.93 0.00 0.00 1,527 969
IE 74,608 55,172 18 1.15 0.01 0.01 19,556 12,403 EL 64,226 47,494 26 1.63 0.01 0.01 23,788 15,087
ES 453,925 335,675 16 1.00 0.09 0.09 103,461 65,617
FR 738,835 546,365 16 1.00 0.15 0.15 168,399 106,801 IT 621,249 459,411 20 1.25 0.12 0.12 176,997 112,255 CY 5,070 3,750 29 1.79 0.00 0.00 2,066 1,310 LV 7,243 5,357 20 1.25 0.00 0.00 2,064 1,309 LT 9,417 6,963 16 0.99 0.00 0.00 2,133 1,353
HU 52,636 38,924 19 1.19 0.01 0.01 14,246 9,035
NL 251,590 186,050 14 0.87 0.05 0.05 49,817 31,595 AT 111,550 82,490 8 0.50 0.02 0.02 12,712 8,062
PL 124,105 91,775 17 1.07 0.02 0.02 30,231 19,173 PT 73,883 54,637 33 2.06 0.01 0.01 34,732 22,028 SK 18,109 13,391 8 0.50 0.00 0.00 2,064 1,309 FI 73,401 54,279 6 0.38 0.01 0.01 6,274 3,979
SE 134,729 99,631 7 0.44 0.03 0.03 13,435 8,521
UK 805,716 595,824 18 1.11 0.16 0.16 204,302 129,572
Total 4,906,249 3,628,151 16 Baseline - - 1,140,734 723,474 Source: RPA Study. Sources of Data: - Turnover B2B: Eurostat - Days delay: private survey. Countries not figuring in Table due to lack of data: BG, LU, MT, RO, SI.
Table 3.8: Value of turnover against which interest is claimed (m)
Value of turnover paid late against which
MS Turnover paid late interest is claimed
SME Large SME Large
BE 22,755 20,616 3,072 3,760 CZ 10,933 9,906 1,476 1,807 DK 5,816 5,269 785 961
DE 151,548 137,306 20,459 25,043 EE 1,069 969 144 177
IE 13,689 12,403 1,848 2,262 EL 16,651 15,087 2,248 2,752
ES 72,422 65,617 9,777 11,968
FR 117,879 106,801 15,914 19,479 IT 123,898 112,255 16,726 20,474 CY 1,446 1,310 195 239 LV 1,445 1,309 195 239 LT 1,493 1,353 202 247
HU 9,973 9,035 1,346 1,648
NL 34,872 31,595 4,708 5,762 AT 8,899 8,062 1,201 1,470
PL 21,162 19,173 2,857 3,497 PT 24,313 22,028 3,282 4,018 SK 1,445 1,309 195 239 FI 4,392 3,979 593 726
SE 9,404 8,521 1,270 1,554
UK 143,012 129,572 19,307 23,632
Total 798,514 723,474 107,799 131,952 Source: RPA Study.
Note:
The figures for turnover paid late to SMEs have been adjusted downwards from those in Table 37 on the assumption that 30% of the turnover paid late would not have generated 5 in interest and might therefore either not be eligible for late payment interest under national legislation, or not worthwhile. The responses from a questionnaire on claims for late payment interest have been used to calculate an average claim rate for all companies. The average claim rate for SMEs is 13.5% of all late payments and the equivalent rate for large companies is 18.24%. Applying these average claim rates to the total turnover paid late to SMEs and large companies produces the results given in this table.
Table 3.9: Value of late payment interest successfully claimed (m)
MS SMEs Large Companies BE 3.88 4.22 CZ 2.72 2.97 DK 0.76 0.83
DE 34.67 37.78 EE 0.21 0.23 IE 3.30 3.60 EL 6.19 6.74
ES 15.19 16.55 FR 24.72 26.93 IT 32.48 35.39 CY 0.54 0.59 LV 0.38 0.41 LT 0.31 0.34 HU 2.82 3.07 NL 6.35 6.92 AT 1.02 1.11 PL 5.28 5.76
PT 10.52 11.46 FI 0.35 0.38 SE 0.94 1.03
UK 39.43 42.96 Total 192 209 Source: RPA Study.
Note:
Although the estimates given in table 3.8 represent the amounts being claimed, not all claims are successful. Companies responding to the questionnaire indicated that for SMEs only 32% on average of the above claims for interest were indeed successful, with the figure for large companies being 29% of claims. Applying these percentages to the figures in Table 3.8 to late payment interest rates and average delays in payments provides the basis for calculating the value of interest successfully claimed, presented in this table.
Table 3.10: Value of bank loans to SMEs to finance late payments (m)
Turnover
Value on % of
which late companies Bank interest Cost of credit Days credit
payments has financing late rate to cover late taken
been claimed payments by payments successfully bank loans by SMEs
BE 990 13 58.5% 9% 1.9 CZ 475 19 58.5% 9% 1.3 DK 253 6 58.5% 9% 0.2
DE 6,591 16 58.5% 9% 15.2 EE 46 15 58.5% 9% 99.3
IE 595 18 58.5% 9% 1,.6 EL 724 26 58.5% 9% 2.7
ES 3,150 16 58.5% 9% 7.3
FR 5,127 16 58.5% 9% 11.8 IT 5,388 20 58.5% 9% 15.5 CY 63 29 58.5% 9% 0.3 LV 63 20 58.5% 9% 0.3 LT 65 16 58.5% 9% 0.1
HU 434 19 58.5% 9% 1.1
NL 1,517 14 58.5% 9% 3.0 AT 387 8 58.5% 9% 0.4
PL 920 17 58.5% 9% 2.3
PT 1,057 33 58.5% 9% 5.0 SK 63 8 58.5% 9% 0.7
FI 191 6 58.5% 9% 0.2 SE 409 7 58.5% 9% 0.4
UK 6,220 18 58.5% 9% 16.0 Total 34,728 86.8 Source: RPA Study.
Note:
It is argued that small firms often have higher financing costs relative to large companies as they do not hold such strong bargaining positions when applying for finance to banks. Table 3.10 uses the turnover value on which late payments has been claimed successfully by SMEs to provide estimates for the value of finance that is required by SMEs from banks to finance late payments. Considering that an online consultation revealed that 58.5% of respondents said that they resorted to bank finance to cover late payments, this figure (an overestimate for the total amount of late payments financed through bank loans since it is unlikely that these respondents would have covered ALL late payments through bank loans) was used to estimate the value of credit together with an assumed bank loan rate of 9% for SMEs and an assumption that the length of the loans taken are equivalent to the average days delay on payment in each Member State.
Table 3.11: Percentage of late payments owed by different sectors
Percentage of late payments 0 10 25 50 75 90 100 NA Public sector Large comp %
22.2 22.2 12.7 7.9 14.3 9.5 3.2 7.9
Small comp % 13.8 13.2 10.1 5.7 13.2 22.0 8.2 13.8 Private sector Large comp %
4.8 20.6 14.3 7.9 11.1 15.9 17.5 7.9
Small comp % 3.8 21.4 17.0 7.5 9.4 10.1 20.8 10.1
Source: RPA Study. The first column of this table indicates, for example, that 22.2% of the large responding economic operators and 13.8% of the small respondents received all payments by public authorities on time. It also shows that 4.8% of the large responding economic operators and 3.8% of the small respondents never experience late payment by private businesses. The last column of this table indicates that all payments made by public authorities were late for 3.2% of the large responding economic operators and 8.2% of the small respondents. 17.5% of the large responding economic operators and 20.8% of the small respondents are always paid late by private businesses.
Table 3.12: Option 3a/1: Potential direct costs of contract renegotiation for companies
in 10 Member States with agreed terms >30 days (m)
SMEs Large Total Total number of companies in countries where average agreed payment period is >30 days
10,673,617 17,845 10,691,462 25% of companies holding contracts with >30 day payment terms renegotiate 1 contract
2,668,404 4,461 2,672,865 15% of companies holding contracts with >30 days payment terms renegotiate 1 contract
1,601,043 2,677 1,603,719
Costs of contract renegotiation 5,000 5,000 Total direct costs of changes to contracts - 25% companies
13,342 22 13,364 Total direct costs of changes to contracts - 15% companies
8,005 13 8,019
Source: RPA Study. Note: This table provides estimates of what the one-off transitional costs of contract renegotiation might be, assuming that 25% of companies holding contracts with greater than 30 day payment periods may seek to renegotiate one contract or that 15% of such companies would seek to renegotiate one contract (based on 20% of companies believing that this measure would have an impact on their business according to a survey). Note that it is assumed that on average only one contract would be renegotiated per company to take into account the fact that a large proportion of contracts are likely to be of a short duration or are completed within weeks or months of any new harmonised contract terms entering into use. Furthermore, it has been assumed that the average costs of familiarisation and renegotiating contracts for these companies would be 5,000 to allow for the time and expenses of both the buyer and supplier (costs of senior management time, legal costs, etc); obviously, the actual costs of familiarisation and negotiations may be minor in some cases and far higher in others (e.g. where considerable legal input is required to the negotiations).
Table 3.13: Option 3a/2: Public procurement by Member States (billion )
Member State 2002 2003 2004 2005 2006 Belgium 40.58 42.54 45.42 49.27 46.78 Czech Rep. n/a n/a 22.65 20.46 30.23
Denmark 33.29 34.50 32.33 29.61 31.99
Germany 366.04 371.46 348.86 364.16 375.47 Estonia n/a n/a 1.26 2.11 2.30
Ireland 16.73 16.97 17.90 20.79 22.45 Greece 21.12 22.18 19.31 18.78 19.64
Spain 93.56 100.54 116.17 126.88 142.88
France 235.76 247.89 282.19 303.80 319.64 Italy 147.79 162.75 209.65 204.12 212.66 Cyprus n/a n/a 1.54 1.53 1.73 Latvia n/a n/a 1.98 2.15 2.63
Lithuania n/a n/a 2.34 2.70 3.91
Luxembourg 3.57 3.73 4.62 4.16 4.59 Hungary n/a n/a 16.11 16.33 19.41 Malta n/a n/a 0.61 0.77 0.77
Netherlands 98.94 104.41 116.12 123.60 136.06 Austria 35.16 36.06 39.44 45.13 44.02 Poland n/a n/a 32.24 38.97 50.17
Portugal 16.86 17.65 22.70 23.23 23.99 Slovenia n/a n/a 4.77 4.08 6.01
Slovakia n/a n/a 7.75 8.76 11.40
Finland 22.55 23.99 25.52 25.62 27.14 Sweden 50.19 51.60 50.60 52.86 56.65
UK 282.52 281.20 309.14 313.13 351.38
Total 1,464.65 1,517.46 1,731.23 1,802.97 1,943.92
Source: RPA Study. Note: The above figures are derived from national accounts. Since 2004, the value of contribution of the Utilities to these totals is extrapolated either from data in the harmonised Input/Output tables available from Eurostat, or from the latest available company annual reports. This change has been explained in more detail elsewhere. For this reason data from 2004 and after is not strictly comparable with 2003 or earlier data. It should also be noted that National Accounts figures for 2005 and earlier years may have been revised since this indicator was last issued.
Table 3.14: Option 3a/2: Payment duration (public authorities to businesses)
Payment Payment
Average duration: Average duration: Average Average
Member payment number of Member payment number of payment payment
State duration in days State duration in days term in days term in days
days exceeding days exceeding 30 days 30 days
Belgium 49.0 75.0 45.0 Lithuania 30.0 39.8 9.8 Bulgaria -- -- -- Luxembourg -- -- --
Czech Rep. 23.0 33.0 3.0 Hungary 30.0 55.0 25.0 Denmark 27.5 35.8 5.8 Malta -- -- --
Germany 25.0 40.0 10.0 Netherlands 27.2 46.0 16.0 Estonia 15.3 19.8 -10.2 Austria 27.0 47.0 17.0 Ireland 36.4 50.7 20.7 Poland 27.7 47.9 17.9
Greece 95.0 157.0 127.0 Portugal 57.4 137.8 107.8 Spain 103.0 144.0 114.0 Romania -- -- -- France 57.0 71.0 41.0 Slovenia -- -- --
Italy 95.0 135.0 105.0 Slovakia 28.0 35.0 5.0 Cyprus 55.4 72.4 42.4 Finland 20.0 24.0 -6 Latvia 20.1 31.3 1.3 Sweden 28.0 35.0 5
U.K. 30.0 48.0 18.0 Source: Tables 3.3 and 3.5
Table 3.15: Option 3a/2: Impact of maximum period of 30 days for payments by public
authorities to businesses (procurement expenditure)
Scenario on the basis of average number of days of earlier payment
Budgetary Additional Budgetary Additional
Average Annual cost in billion liquidity to cost in billion liquidity to number of effective euro for companies in euro for companies in
days of earlier interest rate public billion euro public billion euro payment authorities (1) (1) authorities (2) (2)
Belgium 45 4 0.231 5.8 0.24 6.03 Bulgaria -- 8 -- -- -- --
Czech Rep. 3 4.3 0.011 0.2 0.02 0.40 Denmark 5.8 3.7 0.019 0.5 0.02 0.50
Germany 10 3.2 0.329 10.3 0.37 11.51 Estonia 0 (7.2) 0.0 0.0 0.00 0.00
Ireland 20.7 4.4 0.056 1.3 0.08 1.82 Greece 127 5.2 0.355 6.8 0.36 7.01 Spain 114 4 1.785 44.6 2.47 61.85
France 41 3.6 1.293 35.9 1.57 43.54 Italy 105 4.5 2.753 61.2 2.81 62.50 Cyprus 42.4 4.5 0.009 0.2 0.01 0.24
Latvia 1.3 (10.3) 0.001 0.0 0.00 0.01 Lithuania 9.8 (9) 0.009 0.1 0.02 0.25 Luxembourg -- 4 -- -- -- --
Hungary 25 7.9 0.105 1.3 0.14 1.78 Malta -- 4.5 -- -- -- --
Netherlands 16 3.8 0.227 6.0 0.29 7.64 Austria 17 4 0.082 2.1 0.10 2.43
Poland 17.9 5.7 0.140 2.5 0.29 5.14
Portugal 107.8 4.1 0.290 7.1 0.32 7.71 Romania -- (14) -- -- -- -- Slovenia -- 4.5 -- -- -- --
Slovakia 5 4.7 0.007 0.2 0.01 0.29 Finland 0 3.9 0.0 0.0 0.00 0.00
Sweden 5 2.8 0.022 0.8 0.03 0.92
U.K. 18 3.6 0.624 17.3 0.76 21.13 Total 8.3 204.1 9.9 242.7
Source: European Commission ECFIN. Annual effective interest rate is long term interest and short term (proxied) for Member States between brackets. Average number of days of earlier payment based on the average payment duration set out in Table 3.14. (1) Procurement figures for 2006 See Table 3.13. (2) Procurement figures for 2009, assuming similar annual growth in the period 2006-2009 as in 2004-2006.
Table 3.16: Option 3a/2: Impact of maximum period of 30 days for payments by public
authorities to businesses (procurement expenditure)
Scenario on the basis of the reduction of the average payment term
Budgetary Additional Budgetary Additional
Annual cost in billion liquidity to cost in billion liquidity to
Reduction of effective euro for companies in euro for companies in average interest rate public billion euro public billion euro payment term authorities (1) (1) authorities (2) (2)
Belgium 19 4 0.097 2.4 0.10 2.55 Bulgaria -- 8 -- -- -- -- Czech Rep. 0 4.3 0 0 0 0 Denmark 0 3.7 0 0 0 0 Germany 0 3.2 0 0 0 0
Estonia 0 (7.2) 0 0 0 0
Ireland 6.4 4.4 0.017 0.4 0.02 0.56 Greece 65 5.2 0.182 3.5 0.19 3.59 Spain 73 4 1.143 28.6 1.58 39.61
France 27 3.6 0.851 23.6 1.03 28.67 Italy 65 4.5 1.704 37.9 1.74 38.69
Cyprus 25.4 4.5 0.005 0.1 0.01 0.14 Latvia 0 (10.3) 0 0 0 0 Lithuania 0 (9) 0 0 0 0
Luxembourg -- 4 -- -- -- -- Hungary 0 7.9 0 0 0 0
Malta -- 4.5 -- -- -- --
Netherlands 0 3.8 0 0 0 0 Austria 0 4 0 0 0 0
Poland 0 5.7 0 0 0 0
Portugal 27.4 4.1 0.074 1.8 0.08 1.96 Romania -- (14) -- -- -- -- Slovenia -- 4.5 -- -- -- -- Slovakia 0 4.7 0 0 0 0 Finland 0 3.9 0 0 0 0 Sweden 0 2.8 0 0 0 0
U.K. 0 3.6 0 0 0 0 Total 4.1 98.3 4.8 115.8
Source: European Commission ECFIN. Annual effective interest rate is long term interest and short term (proxied) for Member States between brackets. Reduction of average payment term based on the average payment term set out in Table 3.14. (1) Procurement figures for 2006 See Table 3.13. (2) Procurement figures for 2009, assuming similar annual growth in the period 2006-2009 as in 2004-2006.
Table 3.17: Option 3a/2: Impact of maximum period of 30 days for payments by public
authorities to businesses (procurement expenditure for 2009) Average scenario
Scenario Table 3.15 Scenario Table 3.16 Average scenario Budgetary Budgetary Budgetary
cost in billion Additional cost in billion Additional cost in billion Additional euro for liquidity to euro for liquidity to euro for liquidity to public companies in public companies in public companies in
authorities billion euro authorities billion euro authorities billion euro Belgium 0.24 6.03 0.10 2.55 0.17 4.29 Bulgaria -- -- -- -- -- --
Czech Rep. 0.02 0.40 0.00 0.00 0.01 0.20 Denmark 0.02 0.50 0.00 0.00 0.01 0.25
Germany 0.37 11.51 0.00 0.00 0.18 5.84 Estonia 0.00 0.00 0.00 0.00 0.00 0.00 Ireland 0.08 1.82 0.02 0.56 0.05 1.19 Greece 0.36 7.01 0.19 3.59 0.27 5.30
Spain 2.47 61.85 1.58 39.61 2.03 50.73
France 1.57 43.54 1.03 28.67 1.30 36.10 Italy 2.81 62.50 1.74 38.69 2.22 50.59 Cyprus 0.01 0.24 0.01 0.14 0.01 0.19 Latvia 0.00 0.01 0.00 0.00 0.00 0.00
Lithuania 0.02 0.25 0.00 0.00 0.00 0.00 Luxembourg -- -- -- -- -- --
Hungary 0.14 1.78 0.00 0.00 0.07 0.89 Malta -- -- -- -- -- --
Netherlands 0.29 7.64 0.00 0.00 0.14 3.82 Austria 0.10 2.43 0.00 0.00 0.05 1.21 Poland 0.29 5.14 0.00 0.00 0.14 2.57
Portugal 0.32 7.71 0.08 1.96 0.20 4.83 Romania -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Slovakia 0.01 0.29 0.00 0.00 0.01 0.14 Finland 0.00 0.00 0.00 0.00 0.00 0.00 Sweden 0.03 0.92 0.00 0.00 0.01 0.46
U.K. 0.76 21.13 0.00 0.00 0.38 10.56 Total 9.9 242.7 4.8 115.8 7.25 179.11 Source: Tables 3.15 and 3.16, based on estimated procurement figures for 2009, assuming similar annual growth in the period 2006-2009 as in 2004-2006.
Table 3.18: Option 3b: Interest successfully claimed at different average rates of claim
made (@current late payment interest rates) / m
Ave.
Ave. rate of Ave. rate of Ave. rate of Ave. rate of Ave. rate of rate of
claim = claim = claim = claim = claim = claim =
13.5% 18.25% 18.5% 23.2% 23.5% 28.25%
SME Large SME Large SME Large
BE 3.9 4.2 5.3 5.4 6.7 6.5 CZ 2.7 3.0 3.7 3.8 4.7 4.6 DK 0.8 0.8 1.0 1.1 1.3 1.3
DE 34.7 37.8 47.5 48.1 60.4 58.5 EE 0.2 0.2 0.3 0.3 0.4 0.4 IE 3.3 3.6 4.5 4.6 5.7 5.6
EL 6.2 6.7 8.5 8.6 10.8 10.4
ES 15.2 16.5 20.8 21.1 26.4 25.6 FR 24.7 26.9 33.9 34.3 43.0 41.7 IT 32.5 35.4 44.5 45.1 56.5 54.8 CY 0.5 0.6 0.7 0.8 0.9 0.9 LV 0.4 0.4 0.5 0.5 0.7 0.6 LT 0.3 0.3 0.4 0.4 0.5 0.5 HU 2.8 3.1 3.9 3.9 4.9 4.8
NL 6.4 6.9 8.7 8.8 11.1 10.7 AT 1.0 1.1 1.4 1.4 1.8 1.7 PL 5.3 5.8 7.2 7.3 9.2 8.9
PT 10.5 11.5 14.4 14.6 18.3 17.7 FI 0.3 0.4 0.5 0.5 0.6 0.6 SE 0.9 1.0 1.3 1.3 1.6 1.6
UK 39.4 43.0 54.0 54.7 68.6 66.5
Total 192.1 209.3 263.2 266.6 334.3 324.0
Source: RPA Study. Note: If interest rates would be increased, costs to debtors are likely to increase as a result of the higher interest payments on late payments. This table establishes an estimate for the value of late payment interest successfully claimed by companies in 21 Member States at the prevailing interest rates, on the basis of a number of scenarios based on different higher levels of late payment interest and based on different assumptions regarding the willingness of creditor companies to make claims for late payment interest from their debtor customers. These figures have then been adjusted to produce predictions of the interest successfully claimed at a range of interest rates and with differing levels of average claim rate. Any changes in the amount of interest successfully claimed as a result of imposing more punitive late payment interest rates, whilst representing a cost to debtors, will also represent an equal benefit to creditors. Therefore, the overall net change in costs would be zero, with the measure effecting a change in distribution rather than an increase or decrease in costs. However, this scenario is quite optimistic since the fear of damaging commercial relationship may still refrain many economic operators from claiming interest.
Table 3.19: Option 3d: Costs of imposing flat late payment fees on debtors
No. of invoices paid Late payment fee costs /million Average invoice value (SME)/ late per annum
(SMEs) (millions) @ 100 @ 200 @ 300 @ 400
2,000 17 1,736 3,473 5,209 6,946
1,000 35 3,473 6,946 10,418 13,891 500 69 6,946 13,891 20,837 27,782 No. of invoices paid
Average invoice value (Large)/ late per annum (Large) (millions)
15,000 3 252 505 757 1,009
10,000 4 378 757 1,135 1,514
5,000 8 757 1,514 2,270 3,027
Source: RPA Study. Note: In the absence of a scientifically reliable indication of the number of successful claims for late payment interest, an assumption is made on the average size of an invoice across all transactions of 1,000 for SMEs and for 10,000 for large companies. These figures are used to estimate the number of transactions which are paid late as follows: Number of transactions paid late =
Turnover paid late and successfully claimed
Average invoice size (10,000 or 1,000)
Applying this formula results in figures of approximately 17 million invoices paid late for SMEs and 3.8 million invoices paid late for large companies. The introduction of a Late Payment Fee would imply that debtors would incur these fees in cases where the creditor is successful in claiming late payments. A range of potential fees is included in this table which set out the potential costs of imposing a flat late payment fee in the countries covered by the analysis. It also considers variations in the number of transactions that end up in successful claims for late payment interest by analysing different average levels of invoice value to provide some costs for different levels of late payment fee. Based on the above, the introduction of a flat rate fee for late payments, due on day 1 after the expiry of the agreed or default payment period might lead to costs ranging from 3.5bn to 13.9bn for SMEs debtors (assuming that the average invoice size is 1,000) and from 378 million to 1.5bn for large debtor companies (assuming that the average invoice size is 10,000). Since these costs will be incurred by the debtor and paid over to the creditor, the net effect is only one of redistribution, with the exception of any administrative costs (likely to be small) incurred by the creditor in claiming the fee.
Table 3.20: Baseline scenario: Current payment terms and late payment patterns (B2B)
Negative impact late payment:
costs due to late av. effective Positive impact late payment : Payment terms and
payment (late payment interest value of late payment interest patterns
rate, table 1.1) in mio. Euro, successfully claimed (table 3.9)) based on turnover year 2006
Average Average
payment effective payment (in days) Large Large
TOTAL SME TOTAL SME term (in companies companies days)
Belgium 37,0 50,0 2,690.5 1,636.8 1,053.7 8,1 3,9 4,2 Bulgaria -- -- -- -- -- -- -- --
Czech Rep. 30,0 49,0 1,562.7 922.7 639.9 5,7 2,7 3,0 Denmark 29,4 35,5 764.5 512.3 252.2 1,6 0,8 0,8
Germany 30,0 36,0 7,461.5 3,552.7 3,908.8 72,5 34,7 37,8 Estonia 20,7 35,5 138.8 113.5 25.4 0,4 0,2 0,2
Ireland 39,1 57,5 1,556.6 879.4 677.3 6,9 3,3 3,6
Greece 84,0 110,0 1,919.6 1,509.3 410.3 12,9 6,2 6,7
Spain 73,0 89,0 8,550.2 5,739.3 2,810.9 31,7 15,2 16,6
France 49,0 65,0 13,316.4 7,406.9 5,909.5 51,7 24,7 26,9 Italy 68,0 88,0 14,437.3 10,239.7 4,197.7 67,9 32,5 35,4 Cyprus 67,2 95,8 164.3 140.3 24.0 1,1 0,5 0,6 Latvia 21,5 41,5 276.1 219.9 56.2 0,8 0,4 0,4
Lithuania 30,3 46,2 318.5 206.6 111.9 0,7 0,3 0,3 Luxembourg -- -- -- -- -- -- -- --
Hungary 26,0 45,0 2,111.2 1,241.1 870.1 5,9 2,8 3,1 Malta -- -- -- -- -- -- -- --
Netherlands 26,1 40,0 3,579.1 2,231.9 1,347.2 13,3 6,4 6,9 Austria 27,0 35,0 1,163.8 738.5 425.3 2,1 1,0 1,1
Poland 29,7 46,8 3,415.3 2,020.5 1,394.8 11,0 5,3 5,8
Portugal 47,1 80,1 2,716.0 1,916.5 799.5 22,0 10,5 11,5 Romania -- -- -- -- -- -- -- --
Slovenia -- -- -- -- -- -- -- --
Slovakia 31,0 39,0 184.3 91.1 93.2 -- -- --
Finland 21,0 27,0 530.4 254.0 276.4 0,7 0,4 0,4
Sweden 27,0 34,0 1,162.0 649.9 512.1 2,0 0,9 1,0
U.K. 33,2 51,0 17,301.4 8,397.8 8,903.6 82,4 39,4 43,0 Total 85,320.5 50,620.4 34,700.1 401,3 192,1 209,3 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.21: Baseline scenario: Current payment terms and late payment patterns (B2B)
Net effect of negative and positive impacts of Table 3.20 (in mio EURO)
TOTAL SME Large companies
Belgium -2,682.4 -1,632.9 -1,049.4 Bulgaria -- -- --
Czech Rep. -1,557.0 -920.0 -637.0 Denmark -762.9 -511.6 -251.3
Germany -7,389.0 -3,518.0 -3,871.0 Estonia -138.4 -113.2 -25.2
Ireland -1,549.7 -876.1 -673.7
Greece -1,906.7 -1,503.1 -403.6
Spain -8,518.5 -5,724.1 -2,794.4
France -13,264.7 -7,382.1 -5,882.6 Italy -14,369.5 -10,207.2 -4,162.3 Cyprus -163.2 -139.7 -23.4 Latvia -275.3 -219.5 -55.8
Lithuania -317.9 -206.3 -111.5 Luxembourg -- -- --
Hungary -2,105.3 -1,238.3 -867.1 Malta -- -- --
Netherlands -3,565.9 -2,225.5 -1,340.3 Austria -1,161.7 -737.5 -424.2
Poland -3,404.3 -2,015.2 -1,389.1 Portugal -2,694.0 -1,905.9 -788.0 Romania -- -- --
Slovenia -- -- --
Slovakia -184.3 -91.1 -93.2
Finland -529.6 -253.6 -276.0
Sweden -1,160.0 -648.9 -511.1
U.K. -17,219.0 -8,358.4 -8,860.7
Total -84,919.2 -50,428.4 -34,490.9 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.22: Optimum scenario: Reduction Payment terms to 30 days maximum, no longer
late payment (effective payment equal to payment term) (B2B)
Impact added liquidity due to Impact added liquidity due to improved payment behaviour reduction of payment terms Net effect (in mio EURO,
(effective interest rates, see (late payment interest rates gains +, loss -) table 3.15 and 3.16) Table 1.1)
Large Large Large
TOTAL SME compa- TOTAL SME compa- TOTAL SME compa nies nies nies
Belgium 610.0 371.1 238.9 4,139.2 2,518.2 1,621.0 4,749.2 2,889.2 1,859.9 Bulgaria -- -- -- -- -- -- -- -- --
Czech Rep. -- -- -- 1,562.7 922.7 639.9 1,562.7 922.7 639.9 Denmark -- -- -- 689.3 461.9 227.4 689.3 461.9 227.4
Germany -- -- -- 7,461.5 3,552.7 3,908.8 7,461.5 3,552.7 3,908.8 Estonia -- -- -- 51.6 42.2 9.4 51.6 42.2 9.4
Ireland 356.6 201.4 155.1 2,326.5 1,314.3 1,012.2 2,683.1 1,515.7 1,167.4
Greece 2,182.3 1,715.8 466.5 5 906.6 4,644.0 1,262.6 8,088.9 6,359.8 1,729.1
Spain 9,675.2 6,494.5 3,180.8 31 528.9 21,163.7 10,365.2 41,204.1 27,658.2 13,546.0
France 5,992,4 3,333.1 2,659,3 29,129.6 16,202.5 12,927.1 35,122.0 19,535.6 15,586.4 Italy 12,993.6 9,215.7 3,777.9 41,868.2 29,695.0 12,173.2 54,861.8 38,910.7 15,951.1 Cyprus 101.2 86.4 14.8 378.0 322.7 55.3 479.3 409.1 70.1 Latvia -- -- -- 158.7 126.4 32.3 -- -- --
Lithuania 3.6 2.3 1.2 324.5 210.5 114.0 328.1 212.8 115.2 Luxembourg -- -- -- -- -- -- -- -- --
Hungary -- -- -- 1,666.7 979.8 686.9 1,666.7 979.8 686.9 Malta -- -- -- -- -- -- -- -- --
Netherlands -- -- -- 2,574.9 1,605.7 969.2 2,574.9 1,605.7 969.2 Austria -- -- -- 727.4 461.5 265.8 727.4 461.5 265.8
Poland -- -- -- 3,355.4 1,985.0 1,370.4 3,355.4 1,985.0 1,370.4
Portugal 607,4 428,6 178,8 4,123.3 2,909.5 1,213.8 4,730.7 3,338.1 1,392.6 Romania -- -- -- -- -- -- -- -- --
Slovenia -- -- -- -- -- -- -- -- --
Slovakia 11.4 5.6 5.8 207.4 102.5 104.9 218.8 108.1 110.6 Finland -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0
Sweden -- -- -- 664.0 371.3 292.7 664.0 371.3 292.7
U.K. 1,119.7 543.5 576.2 20,411.8 9,907.5 10,504.3 21,531.5 10,451.0 11,080.5 Total 33,653.4 22,398.1 11,255.3 159,256.2 99,499.8 59,756.4 192,750.9 121,771.4 70,979.5 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.23: Optimum scenario: Reduction Payment terms to 30 days maximum, no longer
late payment (effective payment equal to payment term) (B2B)
Total net effect vs. Baseline Scenario (in mio EURO)
TOTAL SME Large companies
Belgium 2,066.8 1,256.3 810.5 Bulgaria -- -- --
Czech Rep. 5.7 2.7 3.0
Denmark -73.6 -49.6 -24.0 Germany 72.4 34.7 37.8
Estonia -86.8 -71.1 -15.7
Ireland 1,133.3 639.6 493.7
Greece 6,182.2 4,856.7 1,325.5
Spain 32,685.7 21,934.1 10,751.6 France 21,857.2 12,153.4 9,703.8 Italy 40,492.4 28,703.5 11,788.8 Cyprus 316.1 269.4 46.7 Latvia -- -- --
Lithuania 10.2 6.5 3.7 Luxembourg -- -- --
Hungary -438.6 -258.5 -180.1 Malta -- -- --
Netherlands -990.9 -619.9 -371.1 Austria -434.3 -275.9 -158.4 Poland -48.9 -30.2 -18.7
Portugal 2,036.7 1,432.2 604.5 Romania -- -- --
Slovenia -- -- --
Slovakia 34.4 17.0 17.4
Finland -529.6 -253.6 -276.0 Sweden -496.0 -277.6 -218.5
U.K. 4,312.5 2,092.6 2,219.8
Total 107,831.6 71,343.0 36,488.6 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.24: Realistic scenario: Reduction Payment terms to 30 days maximum,
proportional reduction of late payment (effective payment equal to payment term) (B2B)
Impact due to loss of
interests successfully
Impact added liquidity due to
Impact added liquidity due to improved payment behaviour claimed by late payment reduction of payment terms
(table 3.9 "interest (effective interest rates, see
(late payment interest rates) successfully claimed"), table 3.15 and 3.16)
proportional to payment
delay
Large Large Large
TOTAL SME compa- TOTAL SME compa- TOTAL SME compa nies nies nies
Belgium 610.0 371.1 238.9 1,957.7 1,191.0 766.7 3.8 1.8 2.0 Bulgaria -- -- -- -- -- -- -- -- --
Czech Rep. -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0 Denmark -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0 Germany -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0 Estonia -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0
Ireland 356.6 201.4 155.1 1,132.1 639.6 492.6 3.4 1.6 1.8
Greece 2,182.3 1,715.8 466.5 5,221.0 4,104.9 1,116.0 11.4 5.5 6.0
Spain 9,675.2 6,494.5 3,180.8 28,015.1 18,805.1 9,210.0 28.2 13.5 14.7
France 5,992.4 3,333.1 2,659.3 20,976.7 11,667.7 9,309.0 37.2 17.8 19.4
Italy 12,993.6 9,215.7 3,777.9 35,498.8 25,177.5 10,321.3 57.5 27.5 30.0 Cyprus 101.2 86.4 14.8 304.7 260.1 44.6 0.9 0.4 0.5 Latvia -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0
Lithuania 3.6 2.3 1.2 9,2 5,9 3,2 0.0 0.0 0.0 Luxembourg -- -- -- -- -- -- -- -- --
Hungary -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0 Malta -- -- -- -- -- -- -- -- --
Netherlands -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0 Austria -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0 Poland -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0
Portugal 607.4 428.6 178.8 2,393.4 1,688.9 704.5 12.8 6.1 6.7 Romania -- -- -- -- -- -- -- -- --
Slovenia -- -- -- -- -- -- -- -- --
Slovakia 11.4 5.6 5.8 29.0 14.3 14.7 -- -- -- Finland -- -- -- 0.0 0.0 0.0 -- -- --
Sweden -- -- -- 0.0 0.0 0.0 0.0 0.0 0.0
U.K. 1,119.7 543.5 576.2 4,778.0 2,319.1 2,458.8 19.3 9.2 10.1 Total 33,653.4 22,398.1 11,255.3 100,315.7 65,874.2 34,441.5 174.5 83.5 91.0 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.25: Realistic scenario: Reduction Payment terms to 30 days maximum,
proportional reduction of late payment (effective payment equal to payment term) (B2B)
Net effects
Net effect (in mio EURO, gains +, loss -) Total net effect vs. Baseline Scenario (in
on the basis of Table 3.24 mio EURO) Large Large
TOTAL SME TOTAL SME companies companies
Belgium 2,563.9 1,560.3 1,003.6 -118.5 -72.6 -45.9 Bulgaria -- -- -- -- -- --
Czech Rep. 0.0 0.0 0.0 -1,557.0 -920.0 -637.0 Denmark 0.0 0.0 0.0 -762.9 -511.6 -251.3
Germany 0.0 0.0 0.0 -7,389.0 -3,518.0 -3,871.0 Estonia 0.0 0.0 0.0 -138.4 -113.2 -25.2
Ireland 1,485.4 839.4 646.0 -64.4 -36.7 -27.7
Greece 7,391.9 5,815.3 1,576.6 5,485.2 4,312.2 1,173.0
Spain 37,662.1 25,286.1 12,376.1 29,143.7 19,561.9 9,581.7 France 26,931.9 14,983.0 11,948.9 13,667.2 7,600.8 6,066.3 Italy 48,434.9 34,365.7 14,069.2 34,065.4 24,158.5 9,906.9 Cyprus 405.0 346.1 58.9 241.8 206.4 35.5 Latvia 0.0 0.0 0.0 -275.3 -219.5 -55.8
Lithuania 12.7 8.2 4.5 -305.2 -198.1 -107.1 Luxembourg -- -- -- -- -- --
Hungary 0.0 0.0 0.0 -2,105.3 -1,238.3 -867.1 Malta -- -- -- -- -- --
Netherlands 0.0 0.0 0.0 -3,565.9 -2,225.5 -1,340.3 Austria 0.0 0.0 0.0 -1,161.7 -737.5 -424.2
Poland 0.0 0.0 0.0 -3,404.3 -2,015.2 -1,389.1
Portugal 2,988.0 2,111.3 876.7 294.1 205.4 88.7 Romania -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Slovakia 40.4 20.0 20.4 -144.0 -71.2 -72.8 Finland 0.0 0.0 0.0 -529.6 -253.6 -276.0
Sweden 0.0 0.0 0.0 -1,160.0 -648.9 -511.1
U.K. 5,878.4 2,853.4 3,025.0 -11,340.6 -5,505.0 -5,835.7
Total 133,794.6 88,188.7 45,605.9 48,875.4 37,760.4 11,115.0 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.26: Worst scenario: Reduction Payment terms to 30 days, no reduction effective
payment delay (B2B)
Impact late payment: Impact due to increase of
additional costs due to late interests successfully claimed
av. effective payment vs. by late payment (table 3.9 Net effect (in mio EURO,
payment term (late payment "interest successfully gains +, loss -)) interest rates) in mio. Euro, claimed"), proportional to based on turnover payment delay
Large Large Large
TOTAL SME compa- TOTAL SME compa- TOTAL SME compa nies nies nies
Belgium 1,448.7 881.4 567.4 1.9 0.9 1.0 -1,446.8 -880.4 -566.4 Bulgaria -- -- -- -- -- -- -- -- --
Czech Rep. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Denmark 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Germany 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Estonia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Ireland 769.9 434.9 335.0 2.1 1.0 1.1 -767.8 -433.9 -333.9
Greece 3,986.9 3,134.7 852.3 23.3 11.1 12.1 -3,963.7 -3,123.5 -840.1 Spain 22,978.7 15,424.4 7,554.3 45.5 21.8 23.7 -22,933.2 -15,402.6 -7,530.6 France 15,813.2 8,795.6 7,017.6 32.7 15.7 17.1 -15,780.5 -8,780.0 -7,000.5
Italy 27,430.9 19,455.4 7,975.6 86,0 41,1 44,8 -27 344.9 -19 414.2 -7 930.7
Cyprus 213.7 182.4 31.3 1.4 0.7 0.7 -212.3 -181.8 -30.5 Latvia 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Lithuania 6.0 3.9 2.1 0.0 0.0 0.0 -6.0 -3.9 -2.1 Luxembourg -- -- -- -- -- -- -- -- --
Hungary 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Malta -- -- -- -- -- -- -- -- --
Netherlands 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Austria 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Poland 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Portugal 1,407.4 993.1 414.3 12.5 6.0 6.5 -1,394.8 -987.1 -407.8 Romania -- -- -- -- -- -- -- -- --
Slovenia -- -- -- -- -- -- -- -- --
Slovakia 23.0 11.4 11.7 -- -- -- -23.0 -11.4 -11.7 Finland 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sweden 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
U.K. 3,110.4 1,509.7 1,600.7 8,8 4,2 4,6 -3,101.6 -1,505.5 -1,596.1 Total 77,188.8 50,826.8 26,362.0 214.2 102.5 111.7 -76,974.7 -50,724.4 -26,250.3 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.27: Worst scenario: Reduction Payment terms to 30 days, no reduction effective
payment delay (B2B) - Net effects
Total net effect vs. Baseline Scenario (in Baseline scenario: net effect (in mio
mio EURO) EURO) Table 3.21 Large Large
TOTAL SME TOTAL SME companies companies
Belgium -4,129.2 -2,513.4 -1,615.8 -2,682.4 -1,632.9 -1,049.4 Bulgaria -- -- -- -- -- --
Czech Rep. -1,557.0 -920.0 -637.0 -1,557.0 -920.0 -637.0 Denmark -762.9 -511.6 -251.3 -762.9 -511.6 -251.3
Germany -7,389.0 -3,518.0 -3,871.0 -7,389.0 -3,518.0 -3,871.0 Estonia -138.4 -113.2 -25.2 -138.4 -113.2 -25.2
Ireland -2,317.5 -1,310.0 -1,007.6 -1,549.7 -876.1 -673.7
Greece -5,870.4 -4,626.6 -1,243.7 -1,906.7 -1,503.1 -403.6
Spain -31,451.7 -21,126.7 -10,324.9 -8,518.5 -5,724.1 -2,794.4
France -29,045.2 -16,162.1 -12,883.1 -13,264.7 -7,382.1 -5,882.6 Italy -41,714.4 -29,621.4 -12,093.0 -14,369.5 -10,207.2 -4,162.3 Cyprus -375.5 -321.5 -54.0 -163.2 -139.7 -23.4 Latvia -275.3 -219.5 -55.8 -275.3 -219.5 -55.8
Lithuania -323.9 -210.2 -113.7 -317.9 -206.3 -111.5 Luxembourg -- -- -- -- -- --
Hungary -2,105.3 -1,238.3 -867.1 -2,105.3 -1,238.3 -867.1 Malta -- -- -- -- -- --
Netherlands -3,565.9 -2,225.5 -1,340.3 -3,565.9 -2,225.5 -1,340.3 Austria -1,161.7 -737.5 -424.2 -1,161.7 -737.5 -424.2
Poland -3,404.3 -2,015.2 -1,389.1 -3,404.3 -2,015.2 -1,389.1 Portugal -4,088.8 -2,893.0 -1,195.8 -2,694.0 -1,905.9 -788.0 Romania -- -- -- -- -- --
Slovenia -- -- -- -- -- --
Slovakia -207.4 -102.5 -104.9 -184.3 -91.1 -93.2
Finland -529.6 -253.6 -276.0 -529.6 -253.6 -276.0
Sweden -1,160.0 -648.9 -511.1 -1,160.0 -648.9 -511.1
U.K. -20,320.6 -9,863.9 -10,456.7 -17,219.0 -8,358.4 -8,860.7
Total -161,893.9 -101,152.7 -60,741.2 -84,919.2 -50,428.4 -34,490.9 Source : European Commission, DG ECFIN on the basis of average payment terms in days (table 3.3), and turnover table 3.28
Table 3.28: Turnover 2006 (in mio EURO) 1
Turnover total SME large 1 comments rf. companies NACE 1.1
Belgium 795,158 483,750 311,409 excl. C Bulgaria 61,857 40,931 20,926 2005
Czech Rep. 324,538 191,637 132,900
Denmark 435,662 291,953 143,709 excl.C and E40 Germany 4,322,906 2,058,297 2,264,609
Estonia 36,043 29,454 6,589 excl.CA and H Ireland 325,043 183,619 141,423 excl.E40 Greece 283,671 223,033 60,638 excl.C Spain 2,053,175 1,378,189 674,986
France 3,197,686 1,778,620 1,419,066 Italy 2,773,486 1,967,092 806,393 Cyprus 22,073 18,844 3,229 excl.E
Latvia 38,756 30,870 7,886 excl.CA
Lithuania 48,074 31,188 16,886 excl.I62 and K70 Luxembourg 74,393 43,865 30,528 excl. E40 and I Hungary 238,573 140,246 98,327 excl.C Malta - - - 2005, excl.C and
Netherlands 989,307 616,919 372,388 E40
Austria 505,692 320,883 184,809 excl. C and E41 Poland 595,103 352,061 243,042
Portugal 316,212 223,129 93,083 excl.C and E41 Romania 175,821 103,672 72,150
Slovenia 67,334 42,630 24,704 excl.C Slovakia 88,531 43,762 44,769
Finland 339,627 162,632 176,995 excl. C Sweden 605,897 338,852 267,045
U.K. 3,547,762 1,722,018 1,825,744
8.4. Annex 4: Detailed description of the baseline option
(1) Actual payment periods should shorten, on the one hand, with the establishment of the Single Euro Payments Area (SEPA) 79
which will make
all electronic payments across the eurozone as easy as domestic payments within one country and, on the other, through e-Invoicing between business partners
80
. E-Invoicing will become a fundamental part of an efficient
financial supply chain, linking the internal processes of enterprises to payment systems.
(2) Many hurdles for litigation in cross-border cases concerning uncontested pecuniary claims will be cleared by Regulation (EC) No 1896/2006 creating a European order for payment procedure which applies from 12 December 2008, except in Denmark. This regulation simplifies, speeds up and reduces the costs of litigation in such cross-border cases by creating a European order for payment procedure. The new payment procedure also applies to cases in which at least one of the parties is domiciled or habitually resident in a Member State other than the Member State of the court. When the application for a European order for payment fulfils the requirements of the regulation and when the claim appears to be founded, as soon as possible and normally within 30 days of the lodging of the application, the competent court issues a European order for payment. European orders for payment are recognised throughout the Member States without any intermediate proceedings in the Member State of enforcement. (3) Regulation (EC) No 805/2004 creating a European enforcement Order for uncontested claims puts in place a system whereby a judgment certified as a European enforcement order in the Member State of origin must be recognised and enforced in the other Member States (except Denmark) without the need for a declaration of enforceability and without any possibility of opposing its recognition. Moreover, a judgment certified as a European enforcement order is enforced under the same conditions as a judgment handed down in the Member State of enforcement. This regulation applies from 21 October 2005. (4) Regulation (EC) No 861/2007 of the European Parliament and of the Council of 11 July 2007 establishes a European Small Claims Procedure intended to simplify and speed up litigation concerning small claims in cross-border cases, and to reduce costs. The European Small Claims Procedure is available to litigants as an alternative to the procedures existing under the laws of the Member States. This Regulation also eliminates the intermediate proceedings
79 Directive 2007/64/EC on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC will complete an EU-wide single market for payments and provides, amongst others, the necessary legal framework for the SEPA. Moreover, Regulation (EC) No 2560/2001 on cross-border payments in euro eliminates the difference of price between cross-border and national payments. 80 Directive 2001/115/EC of 20 December 2001 amending Directive 77/388/EEC with a view to simplifying, modernising and harmonising the conditions laid down for invoicing in respect of value added tax already requires Member States, since 1 st January 2004, to recognise the validity of electronic invoices and allow cross-border electronic invoicing and electronic storage.
necessary to enable recognition and enforcement, in other Member States, of judgments given in one Member State in the European Small Claims Procedure. This Regulation applies, in cross-border cases, to civil and commercial matters, whatever the nature of the court or tribunal, where the value of a claim does not exceed EUR 2000 at the time when the claim form is received by the court or tribunal with jurisdiction, excluding all interest, expenses and disbursements.
(5) Certain differences between national rules governing jurisdiction and recognition of judgments in civil and commercial matters hampered the sound operation of the internal market. These differences were eliminated with the entry into force of Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters which unifies the rules on conflicts of jurisdiction and simplifies the formalities with a view to promoting the rapid and simple recognition and enforcement of judgments from Member States bound by the Regulation. (6) Many obstacles to the services rendered by debt collection agencies will be lifted by Directive 2006/123/EC on services in the internal market. Debt recovery services which are carried out by service providers outside the context of judicial procedures will fully enjoy the benefits of the directive so that economic operators will have a broader choice of debt collection agencies. Only the recovery of debts by recourse to judicial proceedings is included in the additional derogations from the freedom to provide services, laid down in Article 17 of the Directive. (7) Access to alternative dispute resolution will be improved and simplified in all Member States except Denmark by Directive 2008/52/EC on certain aspects of mediation in civil and commercial matters. Its objective is to facilitate access to alternative dispute resolution and to promote the amicable settlement of disputes. The directive will apply to cross-border disputes.
(8) Economic operators claiming late payment of invoices and/or interest for late payment before a court can be legal or natural persons. Natural persons submitting such claim in a cross-border dispute are entitled, under very strict conditions, to receive appropriate legal aid in accordance with the conditions laid down in Council Directive 2002/8/EC to improve access to justice in cross-border disputes by establishing minimum common rules relating to legal aid for such disputes. (9) Finally, collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator are governed by Council regulation (EC) No 1346/2000 on insolvency proceedings to prevent the transfer of assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position (forum shopping).
8.5. Annex 5: Options discarded at an early stage Options Reasons
Repeal of the Directive The Directive reflects the general principle that payment of interest constitutes a compensation for borrowed capital. The payment of interest for late payment is a logical consequence of this principle.
Risk of fragmentation of the internal market: If the Directive is repealed, it is likely that, over time, statutory interest rates for late payment would vary widely within the EU or would not even be applied so that it would become increasingly unattractive to sell products and services in Member States with a very low (or no) statutory interest rate. The types of statutory interest would also vary between Member States, some of which would opt for simple interest while others would opt for compound interest, possibly combined with other measures. There is no doubt that the repeal of the Directive would worsen the situation in the medium and long term. It would also lead to fragmentation of the internal market.
The Directive guarantees that interest can be charged. However, charging interest for late payment is only a possibility and not an obligation under the Directive. It is therefore important that this possibility exists throughout the EU to give creditors useful tools to encourage payment for goods and services on time. Many enterprises have included this possibility in their contracts or general commercial conditions. 38% of IPM respondents and more than 50% of EBTP respondents apply the statutory interest rate or another interest rate in their general commercial and payment conditions, while 42% of EBTP respondents and 56% of IPM respondents do not apply an interest rate at all.
About 25% of IPM and EBTP respondents frequently or always claim interest for late payment, often successfully: figures indicate that, despite the weaknesses of the Directive, interest for late payment is still an effective instrument for obtaining compensation for late payment.
Furthermore, not a single stakeholder requested or suggested the repeal of the Directive.
The creation of a European Fund aimed at providing finance to SMEs Some sources suggested the creation of a European Fund aimed at providing finance to SMEs at no cost and based on accounts receivable. The fund would be financed through penalties levied on large companies or public institutions that systematically pay late. The fund would give SMEs access to late payment financing, and would be responsible for recouping payment penalties from the relevant large companies or public institutions. However, such a fund would give rise to a large amount of red tape and additional bureaucracy, as mechanisms would have to be implemented to prevent fraud. The measure would involve significant administrative expenditure and might involve complex and lengthy procedures for verifying entitlement. The potential for fraudulent claims on the fund is high. Moreover, it could even send the wrong
signal to economic operators, the very existence of a fund backing up failing late payers could encourage companies to pay late systematically or even to postpone payment for an indefinite period. Furthermore such a EU-wide instrument would also raise thorny issues with regard to subsidiarity. Therefore, this option failed to meet the proportionality principle.
A new programme to enhance SME capabilities Another possibility was the development of a programme to enhance SME capabilities in evaluating clients and managing account receivables. Such a programme could include measures to promote debt collection, factoring and credit insurance for SME's. However, besides national and local programmes specifically targeted at SME's, a number of European funding programmes are already available
to small and medium-sized enterprises: the
Competitiveness and Innovation Framework Programme (CIP) , the European Regional Development Fund , the European Social Fund , the Joint European Resources for Micro and Medium Enterprises (JEREMIE) Programme and the European Investment Fund (EIF) . In addition, the European Bank for Reconstruction and Development (EBRD) currently offers a EU/EBRD SME Finance Facility, which is aimed at supporting the development of SMEs in the new EU Member States and the EU Accession Countries. These measures consist of:
-
-an SME Finance Facility (SMEFF): The objective of the SMEFF is to encourage banks, leasing companies and investment funds to expand and maintain long-term financing of SME operations in the new Member States and certain applicant countries. The SMEFF is managed by the EIB, EBRD, CEB and KfW and consists of two so-called `windows': a loan window providing credit lines from the IFIs combined with incentives for the participating lending institutions, and an equity window providing equity capital.
-
-A High Growth and Innovative SME Facility (GIF): The GIF is managed by the EIF on behalf of the European Commission and is part of the Competitiveness and Innovation Framework Programme, 20072013 (CIP). It comprises two `windows':
-
1.GIF 1, which promotes early-stage (seed and start-up) investments through specialised Venture Capital Funds. These provide capital to innovative SMEs and co-invest in funds and other investment vehicles promoted by business angel networks.
-
2.GIF 2, which promotes expansion-stage investments through specialised risk capital funds providing equity or quasi-equity for innovative SMEs with high-growth potential.
-
-An SME Guarantee Facility (SMEGF): Also part of the CIP and managed by the EIF, the SMEGF has four `windows': a loan window providing debt financing via loans or leasing; a microcredit window providing guarantees for funds which gives loans of smaller amounts and grants to partially offset high administrative costs; an equity window providing guarantees for equity or quasi-equity fund investments in SMEs; and a securitisation window providing securitisation of SME debt-finance portfolios.
-
-A Capacity Building Scheme (CBS): Again under the CIP, the CBS has two parts: a partnership action, which focuses on finance for ecoinnovation; and a seed capital action managed by the EIF, which provides grants to venture capital funds to cover in part their start-up costs and for the long-term recruitment of staff with specific investment or technology expertise.
Furthermore, most companies seem to assess the creditworthiness of their business customers before signing contracts. According to a survey organised for the RPA Report, almost 64% of companies actually check creditworthiness while a slightly higher percentage of big companies (75% of large companies responding) than smaller companies (59% of the smaller companies) do so. Only 13% of companies responded that they did not check creditworthiness. In general, the percentage of smaller companies not checking creditworthiness was higher at 17% than for larger companies (1.6%. Most respondents confirmed that they have pre-set and readily identifiable strategies in place for managing credit and payment issues (with a higher percentage of larger companies having such strategies in place than smaller companies). See also the table at the bottom of this annex.
Many businesses already use the services offered by debt collection, factoring and credit insurance organisations which are service providers operating on a commercial basis. Debt collection agencies are commercial organisations which collect debts on behalf of a creditor for a commission or buy a debt from the creditor at a discounted price. Factoring agencies are commercial organisations (factors) providing short-term finance based on purchase of the client's account receivables at a discount. This transaction can mean the factor assuming the risk for late payment or non-payment (non-recourse factoring) or not assuming such risks (recourse factoring). Credit insurers are commercial organisations offering for a fee to cover credit risk from delivery of a good or service.
Debt collection, factoring and credit insurance organisations will benefit from the different instruments set out under the base-line option. In particular, the implementation of Directive 2006/123/EC on services in the internal market will allow them to explore new markets. The promotion of such commercial activities by a European initiative might be inappropriate and could have a distorting effect on competition in that field.
Thus, this option does not meet the proportionality requirement and was discarded.
Exempt income in the form of late payment interest from VAT Currently, Member States vary in the way they consider late payment as a cost to businesses in terms of reduced cash flow and the calculation of their tax liabilities. If a company does charge late payment interest to its debtors, this is often considered business income, sometimes from the moment when it is actually invoiced; this includes subjecting the interest charged to Value Added Tax (VAT) from the moment when it is charged, even though no funds have actually been received. As a result, the value of monies received from any interest that might
eventually be recovered will be reduced by tax payments. This measure would require harmonisation of VAT legislation to exempt interest for late payment from VAT in all Member States.
It is estimated that SMEs and large companies would save approximately 37 million and 40 million respectively if Member States did not charge VAT on late payment interest. These amounts would be lost revenue to Member State governments.
This option only focuses on the creditor and does not have any effect in encouraging late payers to pay on time. Nevertheless, the risk of fraud would be very considerable
. This option might create a VAT-
loophole, whereby companies would designate other forms of income and payments as "late payment interest" purely to avoid paying VAT on them. Therefore, this option does not meet the proportionality requirement and was discarded.
Promoting the use of Escrow Facilities (non-legislative option) An escrow facility involves a deposit of funds, a deed or other instrument to a third, trustworthy party acting as an intermediary in the transaction. The intermediary receives and holds payment and notifies the seller or provider to deliver the products or render the service. Once the intermediary receives the invoice from the creditor and the acceptance from the debtor, the intermediary forwards the payment to the creditor.
Escrow facilities avoid the problems of late payment since funds are deposited by a debtor (who can obviously pay for the goods) with a third party and the creditor is assured that their customer will be able to pay on time, as soon as the goods have been delivered (and approved). It protects the debtor from having to accept faulty goods, as no money is transferred until the debtor is satisfied with the goods. It also protects the creditor in that cash flow problems stemming from late payments are avoided. The advantage of an escrow facility for SMEs with credit management problems would be to guarantee funds on delivery of goods/services and to reduce the amount of financial management for creditors (as these are managed by the escrow facility). It is not an appropriate system, however, for companies that rely on trade-credit to do business. Currently, escrow facilities are rarely used in B2B transactions by SMEs within Europe, but are becoming more commonly used in consumer-based transactions and for new technologies, such as in software source code licensing, databases, industrial designs, and government initiatives for key-escrow encryption. Larger enterprises occasionally use escrow facilities for transactions where guarantees for payments on delivery of services are required or for large, high-risk overseas contracts where the reliability of the buyer or seller is highly uncertain or unknown. In certain Member States, escrow facilities are used for property exchange transactions. There is currently little evidence of intra-EU trading between SMEs utilising escrow facilities.
Escrow facilities are already available in almost all Member States but are currently not widely used, particularly by SMEs. The latter indicated in consultation that escrow facilities are considered too complicated, the cost is too high and there is no legal protection of the funds whilst with the third party, so if the escrow company were to
declare bankruptcy, then the funds would be lost. Moreover, SMEs which rely on trade-credit transactions and with fewer funds to commit to escrow-type arrangements may end up not being able to compete with larger companies which are more likely to be able to pay on delivery (i.e. large companies could benefit more than smaller SMEs and public services). Similarly, large retailers may prefer not to use escrow as they would lose trade-credit from their extended payment periods, and may not be able to base orders on sales. Suppliers would benefit from escrow as their risk would be reduced, but they may lose customers if they insist on escrow facilities which favour them, rather than the debtors. In addition, some interested parties cited the lack of comprehensive credit risk reports as another obstacle to increased uptake: if a potential customer has a low credit risk, paying for escrow services would be an unnecessary cost.
For these reasons, this option did not meet the proportionality requirement and was discarded.
Promoting the use of securities (nonlegislative option) The timely payment of invoices could be guaranteed by a security given by the debtor. A security interest on goods entitles the creditor to satisfy his outstanding claim from the charged goods to the exclusion of other creditors of the borrower. Hence a security interest gives the secured creditor a right of preferential satisfaction from the goods charged with the security interest. Nowadays, various indirect techniques are usually employed. In some Member States, the rules on sales provide the seller with a statutory right of preferred satisfaction.
Securities for commercial transactions exist already in all Member States. In most Member States, the seller must make his own arrangements. Since the transfer of ownership in the goods is subject to the agreement of the parties, the seller may retain his ownership in them until he has received the full purchase price, as laid down in the Directive. If the seller himself is using credit to finance his credit sales, the lender can usually be secured by transferring to him the seller's retained ownership. Under modern economic conditions it is rarely feasible to deprive the debtor of charged goods. Frequently the goods are not even in the debtor's possession, especially in the case of commercial transactions. In these instances the debtor must be allowed to dispose of the goods while the security interest is maintained. A number of legal systems, however, do not yet recognize the legitimate interests of both parties in this situation. They prohibit any disposition by the debtor and may not acknowledge a security interest in goods that remain in his possession for the purposes of resale.
The rules to be followed in enforcing a security interest differ considerably from Member State to Member State and even within a Member State according to the type of security interest involved. Very often the creditor in a commercial transaction must sell the charged goods by public sale; occasionally he is permitted to acquire the charged goods himself. The rules on security interests are still strongly national in character. National laws differ from one another in their priority rules, either between competing charges or between voluntary and legal charges, and between categories of creditors. Conflicts may arise in the case of cross-border secured transactions in terms of recognition, efficacy and enforcement which may lead to an
increased risk and higher costs for creditors. Moreover, a cross-border secured transaction may involve either contractual or proprietary issues so that different national laws could apply to different aspects of the same case. The profitability of such transactions depends not only on the risk of the transaction per se but also on factors such as language barriers, national legal formalities, taxes, enforcement and priority rules that may differ from Member State to Member State and involve extra risks in certain cases. From the debtor's point of view, a transaction that would be cheaper in absolute terms if it were concluded with a creditor in another Member State may become more expensive because of these factors (see Di Luigi C., "Divergences of Security and Property Law in the European Union: The Need for Action", J.B.L. 6, 2008, pp. 526549; Drobnig U., Snijders H.J., Zippro E.-J, Divergences of Property Law: An Obstacle To The Internal Market?, European Law Publishers, 2006). Finally, securities always involve additional cost. For all these reasons, SMEs relying on trade-credit transactions may end up not being able to compete with larger companies which are more likely to be able to pay on delivery (i.e. large companies could benefit more than smaller SMEs and public services).
These factors lead to the conclusion that the promotion of such securities did not meet the proportionality and subsidiarity requirements.
One of the most frequently used securities in international sales transactions is where the seller insists on payment by letter of credit. A letter of credit is essentially an authorization made by a buyer to his agent (usually a bank) to make payment to a seller. The letter of credit is often used when there is a substantial time lag between the dispatch of goods by a seller and their receipt by the buyer. The seller, having sent the goods off, has fulfilled his part of the contract and seeks payment. The buyer, not having received the goods and being unable to inspect them, will be reluctant to pay. To overcome this difficulty, the buyer and seller arrange to have intermediaries operating in each of the two countries involved make settlement. The buyer instructs his bank to issue a letter of credit authorizing payment to be made to the seller when the latter's part of the contract has been fulfilled (usually when the seller has dispatched the correct quantity of suitable goods). The buyer's bank (the "issuing" bank) ascertains whether or not this has been done by obtaining the cooperation of a bank in the seller's country. This bank (the "corresponding" bank), having inspected all the relevant documents of title and bills of lading to ensure that the seller has performed the contract, makes payment to the seller, often by means of a bill of exchange or other credit device. The document of title, bills of lading, and so forth are then mailed to the buyer. The buyer then reimburses his bank, which in turn reimburses the corresponding bank for making payment to the seller. In 1933 the International Chamber of Commerce in Paris published the Uniform Customs and Practice for Documentary Credits, which was revised several times. The latest revision was approved by the Banking Commission of the ICC at its meeting in Paris on 25 October 2006. This latest version, called the UCP600, formally commenced on 1 July 2007 (see
http://www.iccwbo.org/ ). It has been adopted by banks and by banking associations in almost all countries of the world. Therefore,
there is no further need to promote letters of credit.
Consequently, this option did not meet the proportionality requirement and was discarded.
Developing and Promoting Credit and Financial Management Programmes (nonlegislative option) SMEs currently with poor practices could benefit from an improved ability to manage cash flows and to manage finance requirements more generally. This should improve their profitability and hence increase the potential for growth. Training and support may also make it more likely that SMEs are able to apply the principles of the late payment directive. For example, three quarters of the 1,476 businesses surveyed by www.payontime.co.uk admitted that they were unable to calculate the interest due to them from late payments. This means that many SMEs are not benefiting from the legislation designed to protect them.
In order to help SMEs with limited resources and staff to spend time on administrative and legal issues, programmes could be developed aimed at enhancing SME capabilities in evaluating clients and in account receivables management. Such programmes could provide training and advice on issues and systems for: - accountancy and financial management to improve individuals abilities to prepare and monitor accounting information, with including a discussion on the IT tools and systems available; - how to develop a credit management strategy, what its function is and who should be responsible; - setting up payment collection processes and ensuring that they provide timely information on late payments, performance against targets, etc. (including information on the available IT tools); - negotiating contracts, agreeing payment terms, addressing retention of title issues, and explaining payment procedures to suppliers; - how to calculate late payment interest and to apply other provisions of the Directive, including a discussion on intra-EU trade; - the advantages and disadvantages of different financing alternatives, including the use of bank loans and other service such as factoring; - how to undertake credit checks and to monitor customer payment performance; and - how to manage debt recovery, including the development of collection strategies, details of the tools available, taking legal action, garnishment of accounts, etc.
The services currently being offered by representative organisations and credit and service providers vary considerably across countries, with some providing free or affordable and readily accessible advice and others giving no business support to members. However, it is understood that many of the `free services' have hidden costs, such as charges for credit worthiness checks, sending of invoices and calculating interest on a late payment; or advice may involve a referral to professional consultants/advisors who charge for their services. It is therefore difficult to determine the likely costs to SMEs of increasing access to business management support. The costs will depend on what form the support takes. For example, schemes might include free guides on credit management, a website with credit management and debt recovery information or a national seminar programme on credit management.
At one end of the spectrum, there may be value in expanding
programmes such as that being operated by the EU/EBRD to all EU MS where there appear to be significant late payment problems due to inadequate financing being made available by financial institutions. Increased technical assistance to banks to increase the rate of lending to SMEs could help break the cycle of companies relying on `trade credit'; in addition, the increase in skills within financial institutions may transfer through to an increased skill base within their SME clients.
More direct programmes could expand on those already in use. For example, in Estonia, electronic banking systems are well established and many banks provide options for "Economic Resource Planning", such as management of cash flow and invoices. The IT solutions themselves are free, but customers pay to use the services. The price depends on the volume of use, but is about 3EKK (about 0.20) to send out an e-invoice making a payment is free. Compare this with the cost of out-sourcing credit and financing to a large corporation such as PriceWaterhouseCoopers, which may come as a fixed price or be a proportion of a company's total turnover for a year. Other services come in the form of guides for credit management such as Croner's Guide to Credit Management at around £700 (910). Free programmes aimed at SMEs can also be found on the internet, such as the SME Toolkit which offers software, business forms, training, etc to SMEs, covering topics such as accounting and finance (including credit and collections), financial management, business planning, etc. The divergence between what is currently offered and what could be offered is thus enormous.
In the UK, account receivables management and commercial development are seen more as an issue of awareness, education and training, as opposed to a lack of available technology. For example, the Institute of Credit Management (ICM), SME representative organisations (e.g. FPB), regional business development authorities, and banks, including other lending institutions and the centralised business support hub - Business Link website, are known to provide or promote training and education in these areas.
Information on the annual funding received by Business Link provides an indication of the potential magnitude of the costs that could be involved in MS organisations providing free business advice to SMEs. The budget for the UK Business Link network in 2003 was around £300 million (roughly 390 million), with approximately £27million (35 million) funded by the EU (including under the Single Regeneration budget). This budget covered all services provided (website, local centres, advice and training, etc. covering issues ranging from regulation to export to innovation), not just those related to financial management. The services provided by Business Link are free, but it is clear that many issues involve referral to consultants who may then charge the user. This figure of 390 million compares to 204 billion in late payments to UK SMEs and translates into an investment by the funding organisations of around 245 (£196) per SME company in terms of providing free advisory services.
It is impossible to identify any basis for calculating the costs of developing and promoting credit and finance management programmes for EU-wide roll out. Therefore, the Business Link funding figure is
used here to provide an indication of possible levels of expenditure.
If it is assumed that only 10% of this actual expenditure figure related to credit and financial management services, and that this level of investment per SME company (i.e. 25 per company) was made in the 10 countries with the worst late payment problems, this would translate into costs of around 0.26 billion; or if such a programme of support was rolled out across all 27 MS, it would cost around 0.48 billion, roughly 0.04% of the total value of late payments to SMEs across the EU.
This figure is high compared to the total EU budget for the Enterprise Europe Network aimed at helping SMEs develop their innovation potential - which is 320 million over 7 years. It is therefore likely that the funding of any support programme in relation to late payments would be at a lower level than this, or at least no higher.
To put these figures into perspective, the on-line survey found that smaller companies are willing to pay for improved credit and finance management systems (24% for SMEs as opposed to 9% for larger companies). However, an equal number of SMEs is not willing to pay (22%). The results of the survey suggest that those SMEs who would be willing to pay would generally pay up to <2,500, but that interest wanes as the price increases beyond this. In contrast, 10% of larger companies would be willing to pay <5,000 for these services.
The weakness of this option is that it addresses the problem of late payments indirectly. The willingness of creditor companies to actually charge late payment interest may not necessarily increase. It also requires voluntary up-take by SMEs and it would be difficult to monitor its impact. Furthermore, many Member States already have programmes in place so that care would need to be taken to ensure that advice is consistent across such programmes. Programmes involving a charge or involving referral to external and paid advisory services may deter SMEs .
Therefore, this option did not meet the proportionality requirement and was discarded.
Table concerning the discarded option "A new programme to enhance SME capabilities"
Protection against payment risks: does your company take deliberate steps in order to protect
itself from bad debt?
Yes No
Overall 65% 35% Germany 72% 28% Belgium 66% 34% France 74% 26% Italy 53% 47%
The Netherlands 65% 35% U.K. 60% 40% Source : Altradius Payment Practices Barometer Winter 2007
8.6. Annex 6: overview of the jurisprudence of the Court of Justice about the Directive Article of the Directive Case references Analysis of the Court of Justice
Article 3(1)(e): The creditor is entitled to claim Judgment of 10 In a case which relates to a dispute between individuals, where it is not possible on the basis of national law to include, in the calculation of the costs which an individual who owes a business debt might be ordered to pay, the expenses arising from representation by an abogado or procurador of the creditor in judicial proceedings for the recovery of that debt, Directive 2000/35 cannot of itself serve as the basis for the inclusion of such expenses, since a directive cannot of itself impose obligations on an individual and cannot be relied on against an individual. March 2005
reasonable
compensation from the debtor for all relevant recovery costs incurred through the latter's late payment. QDQ Media SA v Alejandro Omedas
Lechan
Case C-235/03
Article 3(1)(c)(ii): The creditor is entitled to interest for late payment to the extent that he has not received the amount due on time, unless the debtor is not responsible for the delay. Judgment of the Court of 3 April It is explicit in the wording of that provision that a debtor's payment is regarded as late, for the purposes of entitlement to interest for late payment, where the creditor does not have the sum owed at his disposal on the due date. In the case of payment by bank transfer, only the crediting of the amount due to the creditor's account will enable him to have that sum at his disposal. 2008
01051 Telecom
GmbH v Deutsche
Telekom AG
Article 3(1)(c)(ii) is to be interpreted as meaning that it requires, in order that a payment by bank transfer may avoid or put an end to the application of interest for late payment, that the sum due be credited to the account of the creditor within the period for payment.
Case C-306/06.
Article 3(2): For certain categories of contracts to be defined by national Judgment of the As is clear from Article 3(1)(a) of Directive 2000/35, the parties are generally free to fix in their contract the date or the period for payment. It is therefore only in the absence of a relevant contractual clause that the statutory period of 30 days prescribed by Article 3(1)(b) of that directive must apply. Article 3(2) of Directive 2000/35 then allows the Member States to extend that 30-day period, but makes that possibility subject to a twofold condition. First, the option must be limited to certain categories of contracts. Second, with regard to the duration of the derogating period, it may be extended to a maximum of 60 days, if the parties are prohibited from derogating from this by contract or on condition that a mandatory interest rate that substantially exceeds the statutory rate is applicable. Article 3(2) of Directive 2000/35 governs exclusively the possibility afforded to Member States of fixing, in certain limited cases, a statutory period exceeding the 30-day period applicable in the absence of a contractual clause on the date or the period of payment. In other words, only where the parties are silent on the matter does the situation fall within the scope of Article 3(2) of that directive. Court of 11
December 2008
law, Member
States may fix the period after Commission of the
which interest European
becomes payable to a maximum of 60 days provided that they either restrain the parties to the contract from exceeding this period or fix a mandatory interest rate that substantially exceeds the statutory rate. Communities v
Kingdom of Spain
Case C-380/06
Article 4(1): The seller retains title to goods until they are fully paid for if a retention of title Judgment of the In view of the wording of Article 4(1) of Directive 2000/35 and the purpose of that directive, it cannot be inferred from that provision that it is intended to affect any rules other than those which expressly provide, firstly, that it is possible for the seller and the buyer expressly to agree a retention of title clause before the goods are delivered and, secondly, that it is possible for the seller to retain title to the goods until they have been paid for in full. Accordingly, the national rules which concern the enforceability of retention of title clauses against third parties, whose rights are not affected by Directive 2000/35, are still governed exclusively by the national legal orders of the Member States. Court of 26 October
2006
clause has been Commission of the expressly agreed between the buyer and the seller before the delivery of the goods. European Communities v
Italian Republic
Case C-302/05.
Article 5(1): Member Judgment of the As regards the recovery procedures for unchallenged claims, the directive harmonises only the period within which an enforceable title can be obtained, but does not govern forced execution procedures, which remain subject to the national law of the Member States. States shall Court of 11
ensure that an enforceable title can be obtained, irrespective of the amount of the debt, normally within 90 calendar days of the September 2008
Caffaro Srl v
Azienda Unità
Directive 2000/35/EC is to be interpreted as not precluding a national provision [...] pursuant to which a creditor in possession of an enforceable title in respect of an unchallenged claim against a public authority as remuneration for a commercial transaction cannot proceed to forced execution against the public authority before a period of 120 days has elapsed since service of the enforceable title on the authority.
Sanitaria Locale
lodging of the RM/C
creditor's action or
application at the court or other competent authority, provided that the debt or aspects of the procedure are not disputed. Case C-265/07.
8.7. Annex 7: Transposition of Article 3(5) (organizations representing SMEs) and Article 6(3)(c) (threshold of 5) Member State Threshold Representing organizations
Belgium no Possibility exists under national law, but the role of representative organizations is strictly limited to asking the court to grant an injunction against contractual terms drawn up for general use on the ground they are grossly unfair. Bulgaria no
Czech Republic no Denmark no Germany no Estonia no
Ireland yes Greece no Spain no
France no Professional organizations may introduce an action before the civil or commercial courts on the basis of facts which cause direct or indirect detriment to the collective interests of the profession or sector which they represent, or to fair competition. (but
usually
appears in
contracts)
Italy yes Possibility exists under national law, but the role of representative organizations is strictly limited to asking the court to grant an injunction against contractual terms drawn up for general use on the ground they are grossly unfair. Cyprus no Latvia no
Lithuania yes Luxembourg no Hungary no Malta yes
Netherlands no Austria no
Poland no The payment of interest referred to in Articles 5 to 7 may be claimed in the name and on behalf of the creditor referred to in Article 3 by the national or regional organisation acting on his request, provided that the Statute of the organisation concerned provides for the protection of interests of the entities such as the creditor. Portugal no Possibility exists under national law, but the role of representing organizations is strictly limited to asking the court to grant an injunction against contractual terms drawn up for general use on the ground they are grossly unfair. Romania no
Slovenia no Slovakia no Finland no Sweden no
United Kingdom no
8.8. Annex 8: the SME test
-
a)Consultation with SMEs representatives · The options were discussed at the regular meeting between the SME Envoy and SME organisations on 22 October 2008. The discussion focused on the causes of late payment, the role of business organisations in informing SMEs, the need to clarify the rules so that businesses understand them, and on the possibility to extend the coverage of the directive to business customer relations (currently only business to business transactions). · The European Business Test Panel (EBTP) was consulted. See Annex 2. Stakeholders were also consulted through the I.P.M. consultation, the results of which are shown in Annex 1.
· The consultation period for the I.P.M. consultation was extended from 8 to almost 12 weeks in order to allow SME organisation to consult their members, considering also that they often have to translate and explain legislative proposals for their members.
-
b)Preliminary assessment of businesses likely to be affected: during this stage, it should be established whether SMEs are among the affected population. If the preliminary assessment leads to the conclusion that SMEs are amongst the affected parties, the initial presumption is that costs fall disproportionately on small businesses. See sections 2.2.1, 2.3.1, 2.3.3 and Tables 3.1 and 3.2 in Annex 3.
-
c)Measurement of the impact on SMEs The distribution of the potential costs and benefits of the proposals (policy options) over the businesses size, differentiating between SMEs and large enterprises is analysed in the light of the SME's competitiveness (section 3.2) in sections 5.2, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9, 5.10 and in chapter 6. Cost and impacts identified for SMEs were compared with those of large enterprises.
-
d)Assess alternative options and mitigating measures At the end of the impact assessment, there was no indication that the selected options might result in a disproportionate burden for SMEs. Consequently, there is no element showing the need for SME specific measures in order to ensure compliance with the proportionality principle.
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