Do clients really need another excuse not to pay?

As the number of smaller business owners in the UK facing being paid late for services rendered edges past the one million mark, according to BACS, we’re clearly not the only ones who’d welcome anything that results in prompter payment, writes Adam Home, of debt recovery specialists Safe Collections.

Cue European Directive 2011/7/EU, commonly known as the Late Payments Directive (LPD). This is due to be introduced in the UK on March 16th 2013, or before, but it is currently the subject of a government consultation that runs until October 19th.

Under the current proposed legislation, several default deadlines would be introduced for customers to pay suppliers, wherever they may be within the EU; and further guidance governing compensation and interest for late payments would also be included.

As stated above, we're generally supportive of anything that results in prompter payments and stronger rights for suppliers when it comes to chasing non-payment. However, there are a couple of issues we'd raise with the directive as it is currently described.

What’s the LPD all about?

The Late Payments Directive involves four fundamental proposals:

  • a default 30-day payment deadline for most transactions
  • a longer, 60-day deadline for industries including industrial, commercial and healthcare contracts
  • a 60-day deadline on business-to-business deals
  • a €40 minimum compensation on invoices paid late

Together, these proposals aim to protect suppliers against customers who delay payment without good reason, while incorporating some leniency for B2B contracts, and in industries where the client may need to pass goods and services on to an end-user in order to make money to pay their suppliers.

What’s right about the LPD?

Firstly, we're glad to see an EU-wide approach to protecting payments and ensuring more suppliers receive their money by the agreed date.

Under the current proposals, it would also be acceptable to charge interest on overdue accounts, and to recover any extra costs associated with chasing the payment - above the standard €40 minimum - from the non-paying customer, and both of these measures are also to be applauded.

What’s wrong with the LPD?

However, it is the leniency for certain groups that concerns us: why should a customer get two full months to pay for goods or services, simply because they are a business, a retailer, an industrial organisation or a healthcare provider?

While we can appreciate the desire to let these types of organisations sell those goods on before paying for them, in order to protect their cash flow and keep their accounts in the black, no successful company should be operating that close to the limit.

In fact, anyone whose cash flow is so tight that they need to sell their stock before they've paid for it would represent a significant concern for suppliers, who might reasonably doubt that they would ever get paid at all.

Overall, we believe that extending the default credit period may be detrimental not just to business but to the economy as a whole.Many large organisations already use their buying power to bully small businesses into accepting payment terms that border on the unethical and we fear doubling the default period will only encourage longer payment periods.

The €40 compensation proposal

Also, consider the proposed introduction of a €40 minimum compensation for overdue contracts - albeit with the ability to reclaim extra costs for chasing the payment from the non-paying customer - in place of (or alongside) the UK's current £40, £70 and £100 for invoices valued at up to £1,000, up to £10,000 and over £10,000 respectively.

In general, we're in favour of any regime that allows recovery costs to be claimed from the customer; it seems only fair that the supplier should not be left out of pocket, and that late payment should be discouraged in a financial sense.

We would generally support any proposed minimum compensation on that basis, provided that it does not become too difficult to reclaim larger sums for the costs associated with chasing the payment. That means that the new directive should allow companies like ours to continue to provide a good service to those businesses whose customers have left their invoices unpaid.

What do freelancers think about the LPD?

We would be interested to receive your thoughts on the LPD and these two issues in particular (supporting examples can be found on our blog). At the very least, please tell us whether you're in favour or against the proposed legislation. We will be looking to submit our own statement to the consultation before the October 19th deadline, so your thoughts will not go unheard when we are preparing our response.


7th October 2012

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