Tackling Europe’s late payment culture

Government lockdowns in response to the Covid-19 outbreak have restricted companies’ cash flows. European businesses are bracing themselves for a historic recession.

Against this backdrop, the latest European Payment Report (EPR) 2020 finds there’s an increasing risk from debtors of late and non-payments.

- The payment gap is widening across countries, particular in B2B corporate payments.
- More than four in ten (43%) see the risk from debtors increasing over the next twelve months.

The effects of the pandemic

The Covid-19 crisis has placed an even greater pressure on European businesses to safeguard their liquidity. Sharp drops in GDP across Europe are pushing down revenues for businesses, restricting cashflow while increasing pressure on businesses to manage their cash and liquidity more efficiently.

A decline in consumer demand following government lockdown measures presents a long-term challenge to European businesses. As they look to save costs through reducing headcount, this may in turn negatively impact consumers’ ability to pay invoices due to lower disposable income. It’s a vicious circle.

This trend is reflected in our survey. Over half (51%) of respondents say that late payment reduces their liquidity during the Covid-19 crisis, compared with 35% of those surveyed before the impact was felt.

Respondents who say late payments have a "high impact" on their business in following areas:

Businesses that are able to safeguard their liquidity will emerge stronger from the Covid-19 crisis, while those with less liquidity to fall back on may find themselves under threat.

Is legislation the answer?

In 2011, the European Union introduced the Late Payment Directive. Its payment limits are 60 days for business and 30 days for the public sector. Companies are automatically entitled to interest on late payments and a minimum of €40 compensation for recovery costs.

Our survey show a rise in the adoption and usage of the EU Late Payment Directive compared to 2019. 23% of European businesses in our survey say they always use the directive.

Under the European Late Payment Directive you are automatically entitled to interest for late payment and €40 minimum as compensation for recovery costs. To what extent do you use it?

It’s a welcome initiative for many stakeholders, but our survey finds that some companies still lack awareness that they can use this resource:

- 10% of the respondents had not heard of the Late Payment Directive.
- 37% do not access the interest and compensation entitlements; in the Czech Republic, three-quarters of businesses don’t use the legislation at all

Some countries have more success with their own national initiatives. In recent years, the Netherlands and Belgium have passed strict payment laws. This can explain why our latest survey found Dutch and Belgian businesses being much less concerned than the European average about the impact of late payments on their growth ambitions, or even their survival.

To what extent do late payments from customers impact your business: Prohibiting growth of the company.

Fear of losing business

Ultimately, our report finds that many fear losing business or harming their reputation if they take action. Almost seven in ten (69%) said they accept later payments than they’re comfortable with so as not to damage customer relationships.

To what extent do you agree or disagree with the following statements? - We have accepted longer payment terms than we are comfortable with, as we did not want to damage client relationships.

And with their much lower cash flow, small and medium-sized enterprises appear to be especially vulnerable to unfavourable terms: 49% accepted longer payment terms than they feel comfortable with from another SME over the past 12 months, compared with 43% of larger corporations.

Three ways to tackle late payments

Every year we at Intrum help 80,000 clients in 25 countries. We know that securing liquidity is the top agenda for many companies across Europe, as it enables them to meet financial obligations, pay staff and invest in innovation.

Around three and four (73%) of respondents in our survey agree that payments paid on time are critical to building and maintaining trust with their suppliers and partners. In the words on one of our interviewees:

All business is based on trust. In the long-term, the only way to survive is to be ethical

The Covid-19 pandemic is increasing the pressure on businesses, as slowing economic growth reduces demand and supply chains are disrupted.

How can businesses tackle the problem of late payments?

1. Build stronger relationships with customers
   To mitigate the risk of late payments, businesses can aim to make it as easy as possible for customers to pay what they owe and to have an open, transparent communication throughout the process. Choosing the right debt collection partner, who understand the importance of an ethical and professional communication, can support businesses in building even stronger relationships with customers.

2. Look at internal payment practices
   By improving their own payment processes, businesses can insist on better payment practices. Around six in ten respondents agree that paying suppliers late is a governance issue and should be addressed through internal business practices – such as by enabling a culture that supports prompt payment across the supply chain.

3. Larger businesses can show leadership
   Larger businesses can act as role models within their industries. Involvement in voluntary initiatives such as the UK Prompt Payment Code help to promote best practice in companies’ own supply chains.

Read more about how Intrum can help your business with late payments.

The article is based on insights from Intrum’s European Payment Report 2020, describing how late payments impact 10,000 companies across 29 countries in Europe.