Rapidly growing over-indebtedness in European credit scene

Credit has become easily accessible both to individuals and businesses, with the consequence that a number of individuals and traders are consuming or trading predominantly on credit.

Since credit has a ripple effect, the problem crops up when a debtor fails to pay on time, or even not pay at all, affecting the cash flow of his creditor.

Consequently, the creditor will not then be able to honour his/her commitments, and a chain of subsequent events begins - the late payment domino effect.

This scenario is worrying the business community because late payment, or no payment at all, represents a serious threat to the survival of many business organisations, with knock-on consequences for their employees, suppliers, shareholders and the economy at large.

Intrum Justitia, Europe's leading provider of credit management services, carried out a survey earlier this year in 22 European countries involving more than 9,000 companies.

This survey offers critical data for the public and political debate on adequate terms for a sound, prosperous business environment.

In general the result of the survey shows that the majority of the participant companies are strongly concerned about the consequences of late payments.

The report states that payment uncertainty was cited as the most significant obstacle to trade, usually followed by payment duration.

The classic obstacle of "customs duties and taxes" and "administrative obstacles" were considerably less significant in trade in Europe (EU and non-EU member states).

In terms of regional distribution, the payment risk increases from North to South and from West to East of Europe, with the Nordic countries recording the lowest risks and the highest risks being seen in Portugal, the Czech Republic and Lithuania.

Besides cultural influences, including different methods of payment, Intrum Justitia's report states that the payment delay is primarily influenced by two factors:

a. A consistent, professional credit management process - the suppliers are being used as a "free source of financing" to their clients. Surprisingly, the client's administrative problems and disputes on goods and services delivered are secondary reasons;

b. An efficient, effective legal enforcement procedure - the legal enforcement procedures are regarded as too expensive and long winded.

It goes without saying that economic conditions in a country have an influence on payment delays. Certainly, high unemployment and low GDP growth rates do not improve the payment delays in a country.

The report also evaluates the effect of the EU Directive 2000/35/EC on combating late payment in commercial transactions, which came into force in August 2002.

All businesses, irrespective of size and commercial sector, can now:

¤ claim statutory interest for the late payment of commercial debts;

¤ have the right to claim reasonable debt recovery costs; and

¤ the right to challenge contractual terms that do not provide a substantial remedy against late payment.

The success of this Directive is twofold: it depends on the day-to-day business practices; and the effects of the implementation of the consultation paper on the reformation of equity capital accommodation (Basel II).

Although Malta was not one of the 22 countries where the survey was conducted, people in the local business know that we experience an identical scenario, which matches with the general result of the survey. The two factors that are primarily influencing the delays in payment in Europe, apply perfectly to the local market:

Every business organisation selling on credit should therefore be more proficient in its credit management. To ensure healthy cash flow, credit should be managed by people competent in the field of credit management.

A credit policy, taking into consideration the organisation's capabilities, thus satisfying the organisation's objectives, should be written and well communicated with every stakeholder concerned.

In line with the conclusions of the Intrum Justitia report, the local legal enforcement procedures need to be reviewed according to the following criteria:

¤ easily comprehensible and transparent processes;

¤ rapid decision making, especially for low value claims;

¤ all legal costs incurred should be paid by the defaulting debtor;

¤ extensive powers to implement legal decisions; and

¤ creditors should have the right to charge administrative costs and higher interest to the defaulting debtor,

To ensure better payment practices and minimise the risks involved with credit, the Malta Association of Credit Management provides services and information systems to the local trade creditors who in turn would be able to take 'profitable' credit decisions.

Based on trust and reciprocity, MACM members exchange credit information in a legal, ethical manner, which would provide the creditors with early warning signs of payment defaults.

MACM members would have access to search for pertinent information on dishonoured cheques, and overdue accounts of their peers within the same industry, thus preventing further malicious payment defaults.

Moreover, MACM provides its members with public information, such as information on the registered companies and Law Court information including court warrants and details on commercial court cases filed daily in our Law Courts.

Courses leading to recognised Credit Management qualifications will also start in October to enhance the credit management profession in Malta and improve the credit management function within the local business community.

The most effective way to achieve business rewards in the dynamic European market is by combining the workforce's experience with education. In other words by investing in the skills and competences of the workforce.

Mr Busuttil is the administrator of the Malta Association of Credit Management. Visit their Website at www.macm.org.mt.