European regulators are looking to clamp down on late European business late payment payments in 2023.
In the U.K, the government announced the launch of a review into progress made in combating late business payments at the end of 2022, while the European Commission (EC) has included the revision of the late payments directive in its work program for 2023.
Both the U.K. government and EC have described benefits that their policies will bring to small- to medium-sized businesses (SMBs), a mainstay of economies across the region.
In a statement announcing the “prompt payment and cash flow review,” the U.K government said it will “scrutinize existing practices and measures, and the progress in combating late payment, to ensure that the U.K. has the right arrangements in place to best support small businesses.”
For its part, the EC’s 2023 work program lists changing the late business payment rules among a number of reforms intended to provide economic relief to the EU’s struggling SMBs, including a planned financial support package.
“We must remove the obstacles that still hold our small companies back as they are the backbone of Europe’s long history of industrial prowess,” the EC said in a statement.
These guidelines add to existing rules that both the U.K. and the EU already have in place to prevent businesses from taking too long to pay for goods or services.
For example, in the U.K., the payment date for business-to-business (B2B) transactions usually has to be within 60 days of the customer receiving an invoice, or within 60 days of receiving the goods or services.
For public authorities, the rules are even stricter. Public sector contracts must be paid no more than 30 days after invoicing or delivery.
Businesses that fail to pay their suppliers within the legal time-frame are liable to pay interest or debt recovery fees to the payee.
As part of the ongoing review, the government wants to assess how it can better hold firms to account if they fail to uphold the rules. It will also consider progress made on a sector-by-sector basis, assessing individual industries for their overall performance and compliance.
Like the U.K., the EU’s Late Payments Directive requires businesses to pay suppliers within 60 days of invoice or receipt, with the same shorter time-frames expected in the public sector.
But unlike the U.K., when it comes to enforcing the rules, the Late Payment Directive has not always been applied to the same extent everywhere, blunting its effectiveness as a legal instrument to protect SMBs’ cash flow.
How Late Payments Impact SMBs’ Financial Health
Ultimately, the negative impact on small businesses’ cash flows is behind authorities’ efforts to speed up firms’ payment turnaround — a factor that is increasingly critical in light of Europe’s current economic slowdown.
In the November edition of PYMNTS’ “B2B And Digital Payments Tracker,” it was reported that cash flow challenges impact roughly one in four SMBs in the U.K., while 94% of British companies surveyed said that they had experienced at least one month of negative cash flow in 2021.
According to the report, almost half of companies in the U.K. believe late payments hindered their growth in 2021 and 56% of SMBs in the country were concerned about late payment volumes growing.
Whereas larger firms may have larger capital reserves and more efficient credit lines to iron out the fluctuations in cash flow that late payments create, SMBs don’t have this privilege, and may be forced to delay or cancel planned investments if they don’t get paid on time.
In fact, one study found that in 2022, 67% of businesses surveyed said that faster payment cycles would enable them to pay their own suppliers more promptly, while 66% said that faster payments would allow them to invest more to improve their sustainability.