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A farewell to late payment?

The goal of tackling issues related to late payments is important, but results will only follow if the new regulation is backed with appropriate law enforcement techniques, states a recent analysis commissioned by the Hungarian Credit Management Association.

Late payments are responsible for serious damage, both in the private and state sectors, and the EU has recently introduced a new directive to ease the situation. This directive is due to be implemented by local legal regulations by March of this year. While the targets are clear and beneficial, professionals are dubious concerning the actual results of the new regulations, one study concludes.

The new directive is a clear sign that the problem of late payments is acknowledged in the highest circles of decision makers, a study by the Hungarian Credit Management Association says. The directive was a result of lasting debates and negotiations, and given critically different traditions among various EU member states (from the easy-going southern nations to the rigorous punctuality of the northern, Scandinavian states) a compromise was not, by any means, easy to find. But the new legal tools in the hands of creditors is likely to remain insufficient without an improvement in the ability to enforce their rights, industry experts agree.

There are multiple reasons behind late payments, including changes in the macro-economic environment, the accessibility and pricing of financial resources, the credit management practice of suppliers, and most importantly, the structure of the market. Competition and the relative weight of the parties in a specific deal and their ability to enforce their interests are of primary importance, when it comes to late payments and the reactions they trigger. In a highly competitive environment, suppliers are more likely to tolerate long payment terms and late payments, fearing that their business relationship is at risk with the customer. Most companies, therefore, hesitate before warning their clients about payment deadlines, written warnings are sent late, if at all, and any further steps to collect disbursements are rare. More often than not, these companies will not charge any default interest after late payments.

Reality check

Under the current circumstances, the directive’s regulation concerning default interest and the costs of debt recovery (a flat EUR 40 fee in the case of late payments) is expected to further polarize the situation. In a relationship between a small supplier and a major customer (such as in the case of retail chains), it is unlikely that competing suppliers will be able to charge these extra fees; they are more likely to show “flexibility” in order to save their businesses. On the other hand, in the case of a big supplier with many smaller clients (such as a telco), these companies will automatically include these charges in their service fees, and a flat EUR 40 fee, that can be charged one day after the payment deadline, will definitely be painful for many in the SME sector, industry experts say.

According to the new regulation, the certificate of completion must be signed within a 30-day deadline, but professionals doubt that this rule will radically change current practice (particularly widespread in the construction industry) of customers “blackmailing” suppliers by withholding this document, forcing them into further investments despite previous, unpaid work.

Another chapter of the directive uses the term “highly disadvantageous” to exclude situations where extreme payment terms might be agreed, but the phrase lacks accuracy, meaning that in certain cases it will not be applied to situations where suppliers are forced to nod on long payment terms due to the balance of business power.

In the case of procurements, and generally speaking in the relationships between state run and privately owned companies, the directive allows no exceptions from the 30-day deadline rules, so it is fair to assume that this regulation will be part of future contracts, although there are various reasons not to expect drastic changes in late payments by state-run companies. Due to the EU’s excessive deficit procedure against Hungary, the state’s primary goal is to meet its deficit targets by any and all means, which will allow no room for easing off in its current practice of payments. Similarly, the default interest and the flat fee of debt collection will likely be put in every contract, but actually charging these amounts is not expected to become a broadly employed procedure.

Financial experts expect little to no change from the current directive, although they acknowledge the efforts the EU has made in order to tackle the important, but frequently overlooked challenges concerning late payments and long payment deadlines. Instead of direct and immediate changes, however, they also expect that a continuous improvement in the area may result more from companies looking at their payment practices as a question of their good business reputation or image.