Is Europe on the wrong track when it comes to payment deadlines? The question deserves to be asked as the draft European regulation on late payments raises suspicion within the French employers’ federations. Judging the current directive, dating from 2011, to be ineffective, the European Commission, through a proposed regulation of September 12, 2023, is tackling payment deadlines for commercial transactions between companies. For the authors of the text, who believe that “one of the primary causes of payment delays is the asymmetry of negotiating power between a large customer and a smaller supplier”, it is clearly a question of protecting SMEs .
Brussels tightens the screw
“The initiative is commendable”, positive Arnaud Haefelin, president of the European affairs commission at the CPME. It must be said that late payments are responsible for one in four bankruptcies on the continent. And, in terms of punctuality of payments, there is still good room for improvement in Europe: one in two invoices is paid late, or not at all, assures the European Commission. Which obviously has an impact on the competitiveness and sustainability of businesses. “A one-day reduction in late payments would increase EU businesses’ cash flow by 0.9% and save them €158 million in financing costs,” it continues.
Until now, Europe has left States a good margin of maneuver with its 2011 directive. Obviously, this has not been enough. Brussels wants to regain control with a regulation. “While a directive requires transposition in each EU country, a regulation is directly applicable. In the particular case, it would be applied one year after its adoption by the Parliament and the European Council by providing for the same provisions in all member states. The regulation will then apply immediately, including for commercial contracts signed before its adoption”, explains Arthur Pierret, associate lawyer in business law at In Extenso Avocats.
Payment terms of 30 days maximum
Flagship measure which crystallizes the fears of employers: the establishment of a maximum payment period of 30 days throughout Europe for B to B transactions and between companies and public authorities. This period begins from the date of receipt of the invoice, provided that the debtor has received the goods or services. 30 days: this is already the deadline in principle in France. Except that French law provides for multiple adjustments. It authorizes companies to go up to 60 days from invoicing (or 45 days end of month) if this is specified in the commercial contract; certain sectors of activity also benefit from additional deadlines (up to 110 days for agricultural equipment). Exceptions that Brussels intends to reduce to the strict minimum.
As a result, the European project does not arouse any outpouring of joy within French employers. Quite the contrary. At the CPME, Arnaud Haefelin fears that “SMEs will become the jokers”, arguing that “the draft regulation is far too directive” and that “the Devil is in the details”. At Medef, we are just as skeptical: “Reducing payment delays is a major issue but the transition to 30 days is proving complicated. We already know that many companies will not be able to comply with it and that there will be a mechanical increase in payment delays in the short and medium term, because all companies will not succeed in shortening deadlines at the imposed pace.
The winners and losers of payment deadline reform
At Medef, we wonder about the long-term gains for companies: “What B to B companies will gain on the one hand with shorter deadlines from their customers, will they not lose on the other? other vis-à-vis their suppliers? Lawyer Arthur Pierret believes, for his part, that some, such as service delivery companies, have to gain. “Take a drone designer. He can be paid by his client in 60 days while he has to face salaries or loan repayments every 30 days. For service companies, move to 30 days changes a lot of things.”
On the side of the employers’ unions, we counter that the reform of payment deadlines will also weaken companies. Those who risk paying the price are the companies at the end of the chain, in B to C, such as businesses, construction craftsmen or even the hotel and catering industry. They will have to pay their suppliers sooner , but will not be paid sooner by their customers. This could result in cash flow squeezes likely to put these companies in difficulty,” we estimate at Medef.
This is all the more true for certain sectors of activity which today benefit from exceptional regimes in France. This is the case in construction, as David Morales, vice-president of Capeb, explains. Today, for artisanal construction companies, it is possible to have periodic invoices, payable 45 days after their issue. “Small construction companies obtain supplies of materials every day, or even several times a day, from a merchant. The latter does not issue an invoice each time they visit. It waits until the end of the month to do so,” explains David Morales. On the one hand, this Occitan craftsman fears that the draft European regulation will disrupt the way in which craftsmen and their suppliers operate. “As an administrative simplification, there is better than issuing invoices and paying them every day!”, he complains, arguing that the 62,000 companies members of Capeb only employ on average three employees and do not Most of them do not have the human resources for these administrative tasks. On the other hand, by shortening payment terms from 45 to 30 days, “we will end up with a hole in the cash flow”.
A long fight for toy businesses
Another sector where we observe European projects with concern: toys where payment terms are sometimes 95 days net (between January and September), sometimes 75 days (from October to December). What explains this specificity? The strong seasonality of the activity: “Almost half of the stores’ annual turnover is achieved between November 20 and December 20,” explains Philippe Gueydon, general manager of King Cadeau (2,000 employees) and co-president of the FCJPE, the federation of toy retailers. “In toys, there are goods that we bring in at the start of the year and that we only sell just before Christmas. Stock turnover is very slow, it is easy to understand that the sector needs adapted payment deadlines”. Even if Brussels does not completely close the door to exemptions which should only be granted by States “exceptionally”, Philippe Gueydon expects “a long fight”.
“If payment terms are reduced to 30 days, for a specialized business, this represents a cash advance equivalent to one month of turnover”
At the toy federation, we have already taken out the calculator: “If payment terms are reduced to 30 days, for a specialized business, this represents a cash advance equivalent to one month of turnover. It’s enormous “, assures the boss of King Cadeau. Some traders certainly have this level of cash, but “most will have to contact their banks and will have no other choice than to reduce their stocks. The goods will therefore be with suppliers, not in stores: no one I’m not going to find myself there!”, continues the Isère leader. Not to mention that, in a sector dominated by Asian manufacturing, made in France risks faltering. “The joke will be the French manufacturer,” says the co-president of the FCJPE. The French manufacturer must be paid within 30 days, while non-European manufacturers will be able to grant payment facilities to their distributors, who could consequently be tempted to further restrict their purchases outside European countries.
Automatic sanctions for bad payers
The European Commission’s text is not limited to the question of payment deadlines. It includes other provisions to avoid late payments. Because as Arthur Pierret reminds us, “typically, 30 days or 60 days, the difference is not so decisive when we see that certain suppliers do not get paid for months. We are always surprised at the number of companies obliged to go to court to get paid. The business law lawyer welcomes the provisions of the draft European regulation toughening the tone with bad payers.
Brussels wants to act on two levels. It is first of all a matter of pulling the rug out from under attempts to circumvent the texts. “Clauses for verification and acceptance of invoices or goods are very common in commercial contracts today. However, these clauses can make it possible to artificially, and sometimes abusively, extend the payment period,” explains Arthur Pierret. Brussels wants to make them exceptional and supervise them. The European Commission will then make the payment of interest and late payment compensation compulsory and automatic. “The creditor cannot waive his right to obtain late payment interest,” states the Commission, which takes the opportunity to toughen the sanctions. From now on, bad payers will have to pay a lump sum compensation of 50 euros and late payment interest rates corresponding to the reference rates of the European Central Bank, increased by 8%. Good news for Arthur Pierret for whom “the sanctions applied today are not sufficiently dissuasive”.
500 invoices per second
A repressive system which leaves Arnaud Haefelin, of the CPME, doubtful to say the least. “Sanctions already exist. But I don’t know of any company that applies them.” The difference is that today companies can waive it as a commercial gesture, due to a power struggle with the customer or because of recovery costs considered too high in relation to the amount to be recovered.
To protect financiers against bad payers, the European Commission will instruct member states to set up authorities responsible for monitoring and enforcing the rules. “The question is how this can be implemented,” says Arthur Pierret. Perhaps the move to electronic invoicing – which has so far been postponed in France – will help. What is certain is that the future policemen of European payments will have their work cut out for them: each year, nearly 18 billion invoices are issued within the European Union. Which means more than 500 invoices to check every second…