This week, the European Directive 2011/7/EU on Combating Late Payment in Commercial Transactions comes into force.
To summarise, it’s looking to cap payment terms at 60 days unless agreed otherwise, ‘provided such extension is not grossly unfair’ to the supplier. It also sets a maximum period of acceptance/verification to 30 days unless agreed otherwise and again, unless such extension is not ‘grossly unfair’.
Public procurement has a 30 day cap, with no apparent provision for extension. It also sets a floor on penalty interest, which should at least get businesses starting to think in terms of opportunity cost of invoice holding periods.
Speaking with a small supplier interested interested in a predictable cash flow at the ACCA Alternative Finance Conference yesterday, the first comment was “who decides if it is grossly unfair?” The second was “how come they made the verification process longer?”
Valid points. Unless in a niche or strategic position, suppliers don’t have that much bargaining room when selling into a crowded space. Corporate buyers use a mix of criteria when negotiating contracts, and price and payment terms are always interlinked in the formula.
Whilst payables and supply chain are complex areas with a wide number of participants, if I could boil it down, I would say corporates take time to pay primarily for two reasons:
- their own internal processes and technology; and
- careful cash / treasury management – why borrow from a bank when you can purchase on credit?
Assuming technology is in place to enable earlier payment, the corporate treasurer, who factors in the 30-90 day ‘supplier float’ will need to see a drop in price. Or, where pricing margins are so thin that further squeezing is not possible, competitor suppliers will, surprise surprise, offer better payment terms!
It’s a delicate balance between regulating against ‘bullying’ and interfering in the free market. It could be that naming and shaming is more effective than regulation, especially if this starts to threaten public relations and the corporate brand. Or, a mix of carrots (preferable) and enforceable sticks.
Improving finance for small business is a hot topic and highlights a key benefit of e-invoicing. However, at a more basic level e-invoicing improves efficiency and reduces cost in both SME supplier and large buyer.
I think e-invoicing could be both carrot and stick. The UK National Forum on e-Invoicing, a body comprising service providers, business lobby groups and industry bodies, standards agencies and the public sector is engaging various stakeholders in the UK economy to promote adoption (and benefits of) of e-invoicing in the UK.
The ‘carrot’ of e-invoicing is the additional benefits and liquidity arising from a more efficient payables-receivables process. The ‘stick’ would be the increased use of affordable and practical levels of e-invoicing in the public and private sector.
The global supply chain seems to operate on a set of established behaviour that will take time to shift in the short term. e-Invoicing may be the fastest way to improve the situation. The increased visibility and liquidity would generate additional opportunities for behaviour modification, that perhaps mandated processing timeframes, however well intentioned, may not achieve.