The European Commission Directive on Late Payments

In 2011, the European Commission’s approved Directive 2011/7/EU on combating late payments in commercial transactions. Their view is that late payments and long payment terms strain cash flow and increase financial uncertainty among suppliers.

This inhibits the competitiveness and profitability of suppliers and is a threat to European economies. The Directive, which includes regulatory limits on payment term length, required EU member states to comply with its recommendations by March 16, 2013. The most important component of those regulations is the requirement that commercial enterprises pay their invoices within 60 days, unless a) they expressly agree otherwise and b) the payment terms are not grossly unfair to the supplier.

The European Commission expressed the belief that corporate payment practices have a large impact on the European economy. Specifically they believe such practices impact corporate cash flow, the ability to make business investments, competitiveness and employment. They also recognize that payment terms are part of a larger commercial relationship between buyer and supplier. However, there may be circumstances in which undertakings require more extensive payment periods, for example when undertakings wish to grant trade credit to their customers.

SCF provides an ideal way to meet the regulatory requirements of the EU Directive on Late Payments. It also fulfills the key objectives of the Directive by improving cash flow and reducing payment uncertainty for suppliers while at the same time allowing corporates to freely negotiate commercial payment terms. By implementing SCF, buyers will always pay their suppliers on time. This ensures compliance with the late payment aspects of the Directive and eliminates the risk of incurring substantial late payment penalties.

In addition, and more importantly, implementing SCF allows corporates to achieve the most important objective of the Directive – improving supplier cash flow. SCF provides suppliers with on-demand cash flow through the ability to obtain payment in advance of commercially agreed terms. SCF therefore allows companies to comply with the Directive on Late Payments while also enabling them to maintain their commercially agreed payment terms and positively impact supplier cash flow and business competitiveness.