EU Directive on combatting late payment and its unintended consequences on the real economy

The International Chamber of Commerce (“ICC”) – the institutional representative of more than 45 million businesses in over 170 countries –  supports initiatives driven towards creating a culture of reliable and timely payment. While the core purpose of the directive is commendable, closer examination reveals several unintended consequences that raise concerns about its efficacy and broader impacts on contractual freedom, negotiation flexibility, and the vitality of small- and medium-sized enterprises (SMEs). 

1. Impairment of Contractual Freedom and Negotiation Flexibility

The Directive imposes a standard payment term limit, limiting the flexibility for businesses to negotiate terms suitable for their unique circumstances. This ‘one-size-fits-all’ approach overlooks the diversity of industries, business models, and financial capabilities among SMEs. In doing so, it inadvertently infringes upon the fundamental right to freedom of contract, impeding organic negotiations that might better suit the parties involved. 

2. Impact on SMEs as Buyers

SMEs, often operating on tighter margins, face challenges when adhering to the mandated payment periods. By enforcing strict timelines, the Directive can burden SMEs as buyers, potentially constraining their ability to effectively manage cash flow and allocate resources efficiently. 

3. Impact on Liquidity and Access to Finance

The rigidity of payment terms prescribed by the Directive can exacerbate liquidity issues for SMEs. The delayed inflow of funds disrupts cash flow, hindering their ability to invest in innovation, growth, and employment. Moreover, this could lead to increased reliance on external financing, possibly at higher costs, as delayed payments strain the financial stability of these businesses. 

4. Emphasis on late Government to Businesses payments 

Important reminder is also made on the Government to Business payment which often generate more late payments than in regular business to business payments.  

The recommendation put forward by ICC is to avoid a strict cap to payments period and rather allow businesses the freedom to negotiate payment terms (if not grossly unfair) as fundamental right.  

Putting days limitation should only be put forward in absence of an agreement between parties. 

While the EU Late Payment Directive addresses a critical issue of delayed payments, its unintended consequences risk undermining the very businesses it aims to protect. A nuanced approach that considers the diverse landscape of SMEs, fosters negotiation flexibility, and supports, rather than constrains, their financial health is crucial for sustainable economic growth and development. 

This statement aims to highlight concerns while suggesting practical recommendations for addressing the unintended consequences of the EU Late Payment Directive. Adjustments or additions can be made to emphasise specific points or to align more closely with your position. 

ICC remains available to provide further clarification on the points presented above.