When the EU tabled plans to limit all payment terms to a maximum of 30 days, it triggered a swift backlash from industry groups. Following dire warnings that the move would threaten the survival of the bloc’s burgeoning supply chain finance sector, GTR can reveal that authorities have been forced to go back to the drawing board. John Basquill reports.
The European Commission has shelved its controversial overhaul of late payment rules due to resistance from several member states, following industry warnings the reforms could make it unviable for banks to provide supply chain finance (SCF).
The Commission proposed in September 2023 to limit all payment terms to a maximum of 30 days, in a bid to protect companies – particularly SMEs – that are not paid on time.
However, the lack of flexibility within those plans caused outcry among trade bodies, which warned the reforms could remove incentives for lenders to fund SCF facilities and ultimately increase costs and challenges for SMEs.
An amended version of the text was adopted by the European Parliament in April this year – introducing longer terms for slow-moving or seasonal goods – but the proposals were still met with resistance by around half of EU member states.
That, in effect, ruled out the possibility of European Council approval, forcing the Commission to withdraw the reforms as planned, sources close to the matter have confirmed to GTR.
The Commission is now expected to introduce an alternative text at a later date, although as of press time, the proposals have yet to be formally scrapped and no public announcement has been made.
Spokesperson Johanna Bernsel says the Commission “stands behind its proposal for stricter rules to combat late payments” and continues to believe a new payment framework is needed for commercial transactions.
“Late payments are a major problem for Europe’s SMEs and a cause of many bankruptcies among small companies. This is not acceptable,” she tells GTR.
“The Commission is attentive to concerns expressed by certain stakeholders and will bear these in mind while playing its role to facilitate a final agreement between the co-legislators in due course.”
Late payment is considered a serious and growing problem for SMEs. A survey published by working capital solutions provider Taulia in March found that 51% of companies polled are typically paid after the due date on their invoice – up from 36% just two years earlier.
However, during consultations, industry groups raised several concerns about the nature of the Commission’s proposed text.
The financial services industry warned banks would no longer make a reasonable return from funding SCF programmes if payment terms were restricted to 30 days.
Groups said that would damage a rapidly growing industry and potentially force businesses to seek more costly alternatives. It would also mean buyers that borrow elsewhere have more debt visible on their balance sheets, factoring industry group FCI said.
Retail trade association EuroCommerce previously argued that allowing buyers and suppliers to negotiate payment terms is often a “win-win situation”, particularly where buyers – or both parties – are SMEs.
A threat to SCF?
A study by lending software provider Lendscape and publisher BCR estimates that the volume of SCF in use in Europe reached US$534bn last year, rising by almost a fifth compared to 2021.
But Techniek Nederland, a Dutch trade body representing technical service providers, warned during consultations that the EU’s initial proposals would “cut off supply chain financing, taking away a positive form of finance that fills the gap for companies who struggle to find affordable traditional bank finance”.
“This proposal will have a significant impact on the competitiveness of one of Europe’s essential ecosystems and its contribution to local jobs and communities,” it told the Commission.
The Danish Chamber of Commerce added that SCF programmes are “the cheapest financing entrepreneurs and SMEs can get”, but would have become “impossible” if the EU reforms were introduced as planned.
One issue is that funders of programmes could see their returns slashed if terms were shortened, says
Sean Edwards, chair of the International Trade and Forfaiting Association (ITFA).
“If banks can’t make a reasonable return from this business, because everybody has to keep payment terms to 30 days, then a lot of the liquidity will dry up,” he told GTR during consultations. “The general feeling is that the regulation would remove a lot of the incentive for banks to get involved.”
If SMEs are forced to turn elsewhere for financing – a challenge in itself – the costs incurred could be steep.
Richard Wulff, executive director of the International Credit Insurance & Surety Association (ICISA), says calculations from one of its members suggest as much as €2tn of additional financing would be required to plug the gap if SCF is withdrawn.
“It is questionable whether this amount of additional financing would be available and is sure to have a detrimental effect on the price of financing,” he told GTR at the time.
The withdrawal of financing options could also hold back the effective use of ESG metrics across supply chains – an increasingly popular tool, whereby suppliers are financially incentivised to reduce emissions, cut deforestation or meet other agreed targets.
“You need to have well-funded supply chains to encourage participation in ESG programmes,” ITFA’s Edwards pointed out at the time.
“The main feature of these programmes is normally that suppliers can get a discount on their margin, but you need to have some sort of monitoring functionality in place. That comes at a cost, and is often going to be funded by the banks.”
There are also concerns beyond financing. The German Insurance Association (GDV) says a strict requirement to keep payment terms within 30 days would “limit the insurability of accounts receivable in trade credit insurance”.
Insurers may no longer be legally allowed to extend insurance cover for the future supply of goods – common practice in the German market – meaning cover would not apply if the buyer fell into financial difficulty, GDV says.
A further complication faces SMEs that find themselves facing late payment, noted Edwards.
“Late payments are still probably inevitable, and you can imagine that from a commercial point of view, a small supplier is not going to want to beat up its buyer by demanding 8% interest. Maybe the buyer will pay that once, but that could be the end of the relationship.”
ICISA’s Wulff adds it is “unclear… whether companies would actually report late payments with the risk of negatively influencing commercial relationships”.
Industry cheers U-turn
Sources confirm that business group concerns, particularly from SME representatives, played a significant part in EU member states’ reluctance to rubber-stamp the reforms. Some countries also feared the overhaul would clash with existing domestic legal frameworks.
When contacted by GTR, a spokesperson for ICISA welcomed the Commission’s decision.
“The withdrawal of the proposals is a positive step and shows that the evidence that ICISA and others have put forward about negative consequences have had a positive impact,” they say.
“Late payment continues to be an issue, but this will hopefully give everyone an opportunity to work on this topic and find a solution that addresses the real issues that cause late payment.”
ICISA previously said it supports added protection for SMEs, but said the proposed regulation “is very broad-brush and could have a number of unintended consequences”.
Following the U-turn, ITFA’s Edwards says he is “not surprised that the current proposal has been withdrawn”.
“From conversations ITFA had with a number of member state delegations in the Council, the strength of the opposition was clear,” he tells GTR.
“Importantly, they picked up on the point that we had been emphasising, namely that the current draft, if implemented, would suck liquidity out of the supply chain and endanger not just SMEs but the wider European economy.”
Demica’s head of transactional legal, Jonathan Williams, tells GTR the company supports efforts to combat unfair payment practices, but had concerns over “potential unintended consequences” of the proposed text.
“Shortening payment terms could lead to liquidity gaps for buyers, especially in high-interest rate environments,” he says.
“Instead, we see that flexible financing arrangements, including those under the banner of supply chain finance, are a more nuanced way for corporations to manage liquidity efficiently, while preserving the integrity and standard payment terms of the supply chain.”
