Late Payment: New EC Joint Research Center study showcases urgent need for reform of European Directive

On 26 September, the European Commission’s Joint Research Centre (JRC) published the results of a study on Assessing the economic impact of faster payments in B2B commercial transactions. The study had been commissioned last year by the European Commission’s Unit on Late Payment (DG GROW) with the aim to deepen the understanding of the impact of faster payments in business to business (B2B) transactions in the EU. The study is currently only available in English but should become available in more languages in the coming months. The JRC also made available a set of and infographics that illustrate the findings.

The purpose of the study was to measure the impact of faster payments on cash flow, meaning payments carried out in 30 days or a maximum of 60 days according to the Late Payment Directive provisions for B2B transactions. It was run on a sample of 8 EU Member States, namely Belgium, the Netherlands, Germany, France, Italy, Spain, Hungary, Finland plus the United Kingdom, over a period of 10 years (2008-2018) with almost 13 million observations. The methodology used compares the impact on companies that were paid systematically late (i.e., 120 days) with those paid regularly on time within the deadlines set by the Directive, before and after the introduction of the Directive.

According to the study’s final report, if payments in B2B transactions were carried out systematically at 30 days, the cash flow of businesses would increase by 66%. If payments were carried out regularly at 60 days, the cash flow would increase by 10%. For each day of reduction of payment duration, the cash flow liberated would be around EUR 3.7 million, almost 1% on average over a period of 4 years. The study suggests that long payment times affect the liquidity position of companies which can force companies to cut back on employment and investment. It also identifies that the sectors that would be more positively affected by better payment times are construction and manufacturing. The Member States where these effects are more visible are those more exposed to late payments, such as Belgium, Italy, or Spain.

The JRC study becomes available just a few days after Commission President Ursula von der Leyen announced that the Commission would be putting forward an “SME Relief Package”, including the revision of the Late Payment Directive. The Commission’s plan was later further explained in a presentation by Commissioner Thierry Breton (DG GROW) and in a Commission press release. According to the Commissioner, a stronger framework could investigate setting caps for B2B payments, as is the case for the public sector, stronger enforcement with sanctions and monitoring obligations, providing SMEs with effective dispute resolution and mediation tools, preventing abuses and unfair practices. Transparency on payment discipline is critical, the Commission adds, noting that it could build on the Observatory on Late payments, and its pilot in the construction ecosystem, to closely monitor payment performance across industrial ecosystems with regular data. Digital tools could allow creditors to get paid as soon as an invoice is issued. 

EBC has long called for the revision of the Late Payment Directive, which dates back to 2011 and has been time and time again proven unfit for purpose. The publication of the JRC’s study on the effect of prompt payments only strengthens EBC’s arguments for the need of a courageous reform of this framework, which has now become vital for the survival of construction SMEs in Europe.

To read EBC’s position paper on Late Payment, click here