Late payments by businesses, customers and public sector entities are common and can cause cash flow difficulties for small- and medium-sized businesses, sometimes even threatening their survival. The local and international small business lobby often attempts to tackle this problem either through improved late payment legislation or voluntary initiatives by the business community.
The Malta Association of Credit Management (MACM) confirms that Maltese business owners take significantly longer than their European counterparts to collect payments. MACM says it took SMEs 80.9 days to collect payments due to them in 2022, a much more extended period than in most other European countries.
Intrum is Europe’s leading credit management services provider. Its latest report states that it takes business owners across 29 European countries an average of 51 days to settle their bills, customers an average of 27 days and public sector entities an average of 66 days. So what needs to be done to help SMEs recover their money from creditors faster to avoid liquidity problems?
Some businesses would insist that the solution must be better late payment legislation, following rule-of-law principles by imposing penalties on those who do not follow legal regulations. It must be said that the EU already has a Late Payments Directive, issued in 2011. This directive “aims to achieve a decisive shift to a culture of prompt payment and requires debtors to pay interest and the reasonable recovery cost of the creditor if they do not pay for goods or services on time”.
Many small businesses argue that the directive is imperfect and many do not exercise the rights it provides.
Some believe reviewing the directive is necessary to make enforcement more manageable while others want stronger mediation to resolve late payment disputes.
Vanessa Söderberg, the sustainability director at Intrum, argues: “Small firms may have more power than they realise when tackling late payment. They should familiarise themselves with their rights under the EU directive and consider using those options when they struggle with late paying customers.”
MACM is more cautious when advising SMEs on how to improve their cash flow. It advises companies to “keep the bottom line in mind” before resorting to legal measures, arguing that achieving prompter payments “at the expense of sales, revenue or customer satisfaction is a poor strategy”.
Some countries like Sweden adopt two approaches: the rule of law and voluntary initiatives. The combination of voluntary and legislative interventions is a more productive approach.
Admittedly, while some countries have excellent voluntary codes in place, there are still too many instances where SMEs act as banks for their larger customers, placing them under great pressure.
Söderberg has some constructive advice on how small businesses can be treated more fairly. She argues that research confirms most larger businesses acknowledge the importance of paying small suppliers on time and are responsible for doing so. With increasing priority given to stricter ethics in business relations, more businesses are including long payment terms and late payments in their sustainability and corporate responsibility reporting.
While legal action is always an option to enforce prompt payment, dealing with debt when you are a small business owner or self-employed can be daunting. Small business lobbies should do more to make late payment regulations more readily enforceable and promote business-to-business voluntary codes to minimise the problem of late payments.
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