I had a really interesting conversation with a new CreditCruncher user recently about the limited legislation to help business owners reduce the risk of late payments.
This raised, what on the surface seems like a really simple question - can you effectively legislate for late payments? Is it possible to introduce legislation that will improve the payment efficiency of your customers?
As we all know, one of the most common challenges facing SME’s is getting paid on time. Numerous studies and reports repeatedly show that typically, SME’s, experience delays of between 55 and 60 days past the invoice due date before they receive payment.
In an attempt to address this issue an ambitious solution was introduced by the EU, the Late Payment Directive (2011). Essentially this directive enables companies to charge their customers interest on all invoice amounts that went beyond a certain term.
Basically the main provisions are;
The directive was also designed to be a benchmark and individual countries were encouraged to “continue maintaining or bringing into force laws and regulations which are more favourable to the creditor than the provisions of the Directive”.
That all seems pretty reasonable, but has the introduction of this directive had the positive impact on reducing late payments that the EU had hoped for?
In September, MEP’s met to discuss the Late Payment Directive and to review the results from a recently commissioned survey of approximately 10,000 companies across the EU.
Allowing for regional and sectorial variations the survey results made for interesting reading.
Firstly, when businesses were asked about the main reasons their customers gave them for not paying on time the top answers were;
Secondly, when it came to familiarity with the Late Payment Directive, only 27% of the SME’s in the survey had any knowledge of it. Similarly only 33% of SME’s are aware of any local legislation covering late payments.
It is also clear that very few SME’s actually use the directive. In Ireland the quarterly Irish SME credit watch report typically shows that approximately 80% of respondents do not charge late interest. Similar reports in the UK suggest that approximately 79% of SME’s do not charge their customers late interest.
Thirdly, the reasons why so few companies change their customers interest on late invoices were;
It is clear from these survey results that the introduction of direct legislation to encourage customers to pay on time has not had the desired effect!
Business is about relationships and fundamentally most businesses do not want to risk that relationship by punishing their customers that pay late, no matter the financial costs to them.
So, is there another way?