Quarter of European bankruptcies blamed on late payments. What is the Commission doing about it?

One in four bankruptcies in Europe occurs because of late payments. Delays are hugely problematic for entrepreneurs - causing problems with salaries, investment and cash flow. And that's to say nothing of the emotional toll.

So how can the European Commission reverse this trend?

The cost of late payments - by businesses and public authorities - is massive. The annual cost to the European economy is more than the entire GDP of Finland. 

Fashion designer Caroline Dart runs a clothing business in France. Speaking to Business Planet, she explained the strain put on her company when businesses fail to make payments on time.

"We create regular small capsule collections, designed by me. We are now starting to develop the B2B, which is where we are selling to boutiques so it’s a new strategy with its strong points, and also its points that are less easy to manage," Caroline explained.

"If a store decided not to pay, we have a problem on our hands and if that’s multiplied across ten stores, then it really does become difficult, [and] stressful.

"When you are working on an entrepreneurial venture there is no guarantee you are going to get a salary at the end of each month. That’s the big difference. It takes a lot of time and effort to claw back that money… so if you knew that in any case after 30 days the invoice would be paid that would change radically, certainly for our stress levels, our capacity to sleep."

How does the EU protect businesses from late payments?

Chasing late payments costs European businesses €275 billion a year. And there’s a domino effect: every late payment causes another four.  

Retail, construction and the food supply chain are the sectors worse affected.

23 years ago, Europe introduced rules to protect creditors, especially small businesses. 

The Late Payments Directive says public authorities should pay within 30 days. However, there can be exceptions to this rule.

Businesses can have up to 60 days to settle their debts, but this deadline can be broken if the parties agree to do so. Companies are entitled to interest on late payments. 

The revised European Directive will promote a culture of prompt payments, tackle abusive contractual practices and empower small businesses to protect their rights. 

Proposals will be published later in September, and will then be debated by the European Parliament.

What are the unions calling for?

Perhaps unsurprisingly smaller businesses are hardest hit by late payments. The unions want to firm up the payment periods, and close loopholes.

"When you produce a product or you deliver services and you don’t get a payment when you provide those services to your customers that has an impact on your working capital," explained Véronique Willems, Secretary General of SMEunited.

As the Commission is revising the Late Payment Directive, Véronique Willems told Business Planet that she would like to see a 30-day cap on the payment period for business-to-public authority transactions, and a 60-day cap for business-to-business in the new version, adding that the concept of 'grossly unfair' is also "very vague."

Construction is the sector most impacted by late payments. The European Builders’ Confederation (EBC) represents construction SMEs and craftspeople in Europe.

EBC Secretary General, Fernando Sigchos Jimenéz, told Business Planet why long ‘value chains’ in construction lead to problems for those at the end of the chain.

"Sometimes there is a mismatch with the fact the main contractor, usually bigger economic operators push to wait for the whole project to be delivered in order to pay the different actors that were active on the project. And this creates an imbalance of power.”

The European Green Deal - with its solar targets and green builds - means the construction sector is under pressure to deliver. 

"To get into a greener way of doing construction you need to invest either in more people or in innovation and that is something that is killed in the egg because of the late payments situation," Fernando Sigchos Jimenéz added.

With the COVID-19 pandemic, Brexit, and the war in Ukraine, European businesses have been battered over recent years, with smaller businesses often bearing the brunt.

An effective revision of the late payments directive could be a step toward a more secure future.