I spoke at a conference organised by the AFDCC (the French equivalent of the ICM) last Friday in Paris. It was a good event held in a very impressive venue and about 150 delegates assembled to hear about and debate, amongst other things, the new EU Directive on Late Payment. One of the keynote speakers was Barbara Weiler MEP, an architect and key driver of the new Directive. Her passion for the benefits on business of improving payment terms is not in doubt and her energy has clearly been instrumental in getting the Directive adopted.
The recent survey of ICM members conducted by Equifax showed that 65% of respondents believe the Government should do more to protect small businesses from the negative impact of late payments, and there can be no argument that the existing legislation has not worked in the way intended. Businesses, and particularly small ones, are either ignorant of the law, don't know how to use it, or are afraid to do so for fear of losing a customer. There are exceptions of course; I know credit professionals who use it very successfully and mitigate the cost of financing extended credit by so doing, and I know others who generate a late payment 'charges and interest' invoice to accompany the first collection letter very effectively.
Primarily, the real financial benefit comes when legal action is taken and the late payment charges and interest are added to the principal debt and can significantly increase the amount recovered. But that was never the point of legislation - it wasn't intended to make for better recovery at the end of the food chain; the idea was to improve payment behaviour from the start!
Unfortunately, politicians often seem to miss the point of what happens in the real business world and this is no exception. The Directive states that, if payment terms are not agreed in the contract, then the assumed terms shall be 30 days and - if payment terms are set out in the contract - they cannot be 'grossly unfair'. The definition of 'grossly unfair' is unclear but, in any event, how many small companies would be willing or able to take legal action to argue the case and get remedy? The inclusion of a clause allowing a supplier to recover reasonable actual debt recovery costs (in addition to interest) rather than just the current standard late payment charge is positive but is again a back-end benefit, not a front-end incentive to change payment behaviour.
For me, the most encouraging thing in the whole conference was Barbara Weiler saying that the Directive is as much about changing the culture of payment through soft issues as it is about introducing hard legislative measures. The UK has been lauded for its Prompt Payment Code (administered for BIS by the ICM of course) and educational activity like our Managing Cashflow Guides are also recognised as leading the field. As credit professionals we have more opportunity than most - and should use it - to influence that change of culture by adopting credit management best practice. We can and should be more powerful and effective than a Directive and if the Directive gets more attention and visibility for the importance of cash-flow management and the value we add to businesses, then - for that reason alone - I welcome it.
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