In mid-September 2023, the EU put forward a proposal to limit payment terms in all B2B transactions happening in the EU to 30 days, without exceptions. If this turn into law (to be adopted by all member states), the implications would be extreme. 

The logic behind the proposal is clear and, to a large extent, understandable. Late payments are unethical, especially when affecting SMEs. A society that wishes to foster the growth of smaller companies, for the benefit of the overall economy, should automatically set in place mechanisms to prevent unethical payment terms towards them. 

This issue affects all companies, a recent study from Intrum Justitia found that close to 80% of respondents have accepted longer payment terms that they felt comfortable with, most of the time upon a request of a large company or multinational. This is of course problematic, also considering that – across the entire sample – there is a 13-day lateness (that is, companies are paid on average 13 days after contractual payment terms). Late payment terms increase costs and weigh down competitiveness, and they are clearly a bigger issue for SMEs than larger companies. 

That said, there are critical issues in this directive: 

1. Payment terms on paper are essentially already in line with the directive. The same report shows that payment terms across the sample are right now at 38 days. This is a mere 8 days higher than the limit set by the directive. Arguably, this is not what the EU Commission wants to regulate (we assume). Of course, such a measure is subject to high variance, and some countries that we will not name (cough…Italy…cough) have surely higher payment terms. Clearly, the central issue of the directive is not payment terms, but lateness. As mentioned, the same report indicates that actual payment terms are longer than 38 days (at around 51 days). The directive, however, focuses on contractual terms, with the measures for properly defined lateness already largely present in previous directives. This leads to our second point; 

2. Existing measures for lateness are not used. There are already ample measures in the EU for ‘combating’ lateness, introduced with previous directives, starting more than a decade ago. They are, however, not used. The same report shows that more than half of the respondents subject to late payments do not use (but are aware of!) late payment penalties, with a mere 16-18% using them on a regular basis. This shows that existing measures to combat lateness are essentially ineffective. Occam’s razor says this directive risks being ineffective too, as the penalties for lateness (as in paying after contractual terms) are not markedly different from what is currently (sparsely) used. 

3. Payment terms and competitiveness. Penalties are not used because – it seems to us – payment terms are a negotiation lever, not only on the buyer side but on the supplier side as well. Some suppliers agree on long (sometimes even late) payments because they believe that is the best choice in the complex balance of relationship factors and costs with their buyers. For example, accepting long payment terms might set apart suppliers in competitive markets. Why would this be intrinsically wrong? Clearly, there should be a limit to payment terms, to avoid such a mechanism ‘leaking’ into the territory of unethical behaviour. Is 30-day payment terms really such a limit? 

4. Trade finance exists. Finally, let’s mention the elephant in the room. There are solutions to alleviate long (and late) payment terms. This is one of the core objectives of the SCF approach. Far from us to be the promoter of a rosy utopian view of SCF, it’s fair to say under the right circumstances SCF (and trade finance more in general) works quite well in this regard. This, incidentally, the directive agrees with. It does so while discussing the obvious issue of loss of competitiveness for companies bound to pay suppliers in 30 days within the EU while selling outside of the EU. Worry not, the directive informs us that this is not a problem, as ‘trade finance solutions significantly limit the impact’ of such a mismatch. It remains unclear why trade finance solutions don’t significantly limit the impact of such a mismatch within the EU (where, incidentally, the risk and associated costs of those solutions are both much lower). 

To keep it short, we’ll stop here. We stand behind the idea of this directive. Lateness in payment terms is unethical. However, the efforts here seem focused on defining what ‘late’ means on behalf of the suppliers that have to get paid, rather than letting them define it and help enforce it effectively. 

Instead, ‘late’ – and by extension unethical payment behaviour – is defined as payment past 30 days for any B2B transaction, period. “That which is willed; and farther question not”, famously said Dante. However, there is abundant evidence that these efforts (to put it mildly) might be in vain, as discussed above. Previous directives are rather ineffective (shows Intrum Justitia, for example), and equating lateness with long seems to only make things worse. 

Thus, where’s the constructive part? We believe it should be possible (and, from our humble perspective, desirable) to combat late payments, especially from the perspective of helping companies with limited bargaining power to avoid unethical situations (read: SMEs). Doing this is incredibly complex and it involves, for example: 

• effective instruments to ‘combat’ true lateness, such as proactive checks on multinational and large companies from national regulators to verify whether they comply with (reasonably set) payment terms legislations; 
• legislating directly on trade finance instruments to introduce safeguards against unethical behaviour (for example, legislating on invoice approval time and payment term extensions within approved-payable financing solutions); 

• facilitating access to alternative trade finance solutions for smaller companies that face extensive payment terms (which the directive itself recognised as quite effective); 
• legislating payment terms similarly to how many countries do on usury, with dynamic upper limits and recognising differences in products or industries (ultimately, payment terms are loans, so why not?). 

There are ample possibilities for improving the payment term situation in Europe. Defining ‘late’ as anything beyond 30 days and expecting the situation to improve doesn’t seem to be one of them.