New EU Late Payments Legislation: Are you prepared?
As we enter a new financial year, European Union countries are incorporating EU Late Payment legislation into local law.
Are you prepared?
Let’s have a quick recap of the new legislation:
- The Late Payments Legislation is EU Council directive 2011/7/EU.
- It has to be transposed into national law of EU member states by 16 March 2013.
- Public authorities will have to pay for goods and services within 30 days or, in very exceptional circumstances, within 60 days.
- Enterprises will have to pay their invoices within 60 days, unless they expressly agree otherwise and if it is not grossly unfair.
- Enterprises will automatically be entitled to claim a minimum fixed amount of €40 as a compensation for recovery costs and interest at least 8% points above the European Central Bank’s reference.
This seemingly common sense initiative is good news for small businesses; however, we must wait and see how this is interpreted into local law and what the working practices are.
Here are my assumptions for the new legislation:
- The payment term starts when the buyer receives a clean and valid invoice.
- The legislation applies to buyers in the EU paying EU-based suppliers.
We don’t yet know the impact of local legislation and working practices for cases where an EU-based buyer pays a non- EU supplier; for example, a UK buyer paying a Chinese supplier. Likewise, it is very much wait and see if a non-EU buyer must conform to this legislation when paying an EU supplier; for example, an American buyer paying an Italian supplier.
There are really two perspectives to consider here: the buyer’s and the supplier’s. Many buyers will already have processes and systems in place to pay their suppliers in less than 60 days (and, at the moment, to choose to have payment terms beyond that). So meeting this legislation shouldn’t be a problem, but for those that don’t have sufficient technology in place, I see five options:
- Implement accounts payable technology such as e-invoicing to streamline the invoice receipt-to-settle process
- Outsource the F&A operation to a BPO provider
- Look to your bank to pay suppliers on time and pay your bank when you see fit (supply chain financing)
- Hire more Accounts Payable staff
- The ever-present do nothing
In my view, the first option will be the most popular, as e-invoicing technology has a proven track record of assisting enterprises in achieving world-class, on-time payment performance.
For suppliers, over time I expect that payments will start to harmonise around the agreed terms. This will eliminate some old paper tricks: suppliers back-dating invoices and buyers rejecting paper invoices late into the payment term. In the short term, however, I see some unintended consequences:
- The small supplier may not hold large buyers to task out of fear for loss of repeat business
- Larger suppliers may well demand payment and auto enforce the legislation on smaller buyers
One thing is clear; supply chain collaboration will take on great urgency. That adds momentum to electronic invoicing, which is now well established across all corners of globe, for enterprises of all sizes and locations. The journey of true end-to-end process optimisation is frequently started with electronic invoicing – the time for preparation is over, the time for action is now.