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Governments and small business advocates are working on fixing problems related to late B2B payments and extended payment terms.

Solving the Late B2B Payments ProblemARTICLE

By Karen Lynch

Governments and small-business advocates across the world have been working to fix the problems of late payments and ever-lengthening payment terms in the business-to-business (B2B) world, particularly those affecting small suppliers selling to big buyers.

Public procurement rules, voluntary codes of practice in the private sector and other policy initiatives have been launched from Australia to the U.S. to the U.K. and beyond. However, results to date have been mixed, according to recent reports. Some have been redoubling calls for regulation, while others are turning more toward business, technology and finance solutions.

Late and extended B2B payments represent small businesses’ No. 1 problem, according to an April 2017 report from the Australian Small Business and Family Enterprise Ombudsman.1 They slow cash flow, forcing suppliers to finance shortfalls in working capital instead of investing in growing their business, the report said. Worst case, they can drive resource-strapped small and mid-sized enterprises (SMEs) out of business.

The European Commission has calculated that each day a B2B payment is late can cost European companies an aggregate €158 million ($187.3 million) in finance expenses. Overall, observers have noted pockets of both improvement and deterioration in B2B payment practices.2

A report from the Organization for Economic Co-operation and Development (OECD) cited a decline in late B2B payments in many countries in 2015 – with delays ranging from four days in Denmark to 66 days in Colombia – largely due to the improving economy.3 But in the U.K., for instance, another survey said that 20 percent of SMEs had late paying customers in 2016, up from 11 percent the previous year.4

The problem is also seen as limiting import-export trade. Nearly a quarter of U.S. SMEs that don’t export blamed their reluctance to trade on fears about not getting paid, in the 2016 Small Business Exporting Survey.5 For those that do export, two-thirds reported shipping their product or service to some customers only upon payment in full, 44 percent said they accept 30-day payment terms from at least some of their customers, and 27 percent ship under bank-issued letters of credit. The percentages sum to more than 100 because it was a “check all that apply” question.9

Where there have been recent declines in late B2B payments, many are simply due to extended payment terms, which also disadvantage SMEs, according to the Australian ombudsman and other observers. In the wake of the 2008 financial crisis, terms reportedly were extended to as high as three months6 – well beyond the more typical 30 calendar days from the date of invoicing. “While the recession has long since passed, the practice is still very much in use today,” according to an executive at a supply chain platform provider.7

As a result, six out of ten businesses complained about being asked to accept longer payment terms than they feel comfortable with, in the 2017 European Payment Report. That’s up from four out of ten last year.8

Advocating Prompt Payment

Several governments have introduced “prompt payment” rules for public procurement at the national, state and local level, to serve as an example and drive change throughout their supply chains. For example, the state of California requires its agencies to pay within 45 calendar days, or to automatically begin adding a 14.25 percent (annual percentage rate) interest penalty to late B2B payments.9 In the U.K., 32 government suppliers have agreed to pay 95 percent of their own suppliers’ invoices within 60 days, and have committed to gradually move to 30-day payment terms.10

The Australian ombudsman is likewise urging its government to “show the power of government action through faster payment times to suppliers and use government procurement policies to spread the economic benefits of faster payment through the whole supply chain.” It is recommending a payment time of 15 days and a requirement to buy only from businesses that adopt such public procurement practices with all of their subcontractors as well.11 The Business Council of Australia unveiled an industry-led Supplier Payment Code soon after the ombudsman’s report, binding 32 signatories to pay small business suppliers within 30 days of invoicing.12 However, the ombudsman made it clear that, “while voluntary codes and other soft measures provide an option for businesses to signal their good intentions, it is only the power of legislation which will compel businesses to meet payment standards.”13

Policy implementation is another challenge; the European Commission continued taking steps earlier this year to drive its six-year-old Late Payment Directive into practice, by requesting action from four countries to introduce faster payment and greater transparency about payment performance in their national markets. “Overall, the implementation of the directive is positive,” the commission said, citing an average 10-day shortening of delays in public sector payments across the EU. However, “in some member states, payments by public authorities can on average take up to 130 days (and even up to 500 days in certain sectors).” Italy and Slovakia were cited for late payments; Spain was cited for extended payment terms; and Greece was called out for new legislation removing creditors’ rights to interest and compensation. “Further progress with the implementation of the directive is still needed,” the commission concluded.14

Progress has been hampered by marketplace dynamics, observers say, since small suppliers fear antagonizing their big business customers, while those larger companies are also striving to improve their own working capital efficiency.15 Even where there are policies and codes in place, small businesses often do not take advantage of them due to the market imbalance between bigger and smaller companies. And even where there has been improvement, policy initiatives seem to have played less of a role than the improved business climate, according to the OECD.16

B2B Late Payment Solutions

Smart procurement practices, new technology and supply chain financing are cited among the tools available for SMEs to improve their own situation. For instance, SMEs should research potential customers and their payment records, send out late payment reminders and, if necessary and applicable, exercise their statutory right to charge interest on late payments, according to the U.K. Federation of Small Business.17 Another observer underscored the importance of managing business relations, saying “supply chain management, at the end of the day, is still heavily influenced by relationships.”18

Technological solutions such as payment performance databases,19 e-invoicing and working capital platforms can help suppliers get paid more quickly.20Supply chain finance solutions could include “reverse factoring” arrangements, in which the buyer helps finance procurement through a third-party financial services company.

Figuring that humor could also be part of the solution, a New Zealand provider of accounting software launched an awareness-raising campaign including a parody of Adele’s “Chasing Pavements” song, called “Chasing Payments.”21

The Takeaway

SMEs can be hard hit by prevalent trends in late B2B payments and extended payment terms. A growing number of policy, business, technology and finance solutions are chipping away at the problem. But results so far have been mixed.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners

Sources

1. Payment Times and Practices Inquiry – Final Report, Australian Small Business and Family Enterprise Ombudsman; http://www.asbfeo.gov.au/sites/default/files/ASBFEO_Payment_Times_and_Practices%20Inquiry_Report.pdf
2. Report from the Commission to the European Parliament and the Council on the Implementation of Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on Combating Late Payment in Commercial Transactions, European Commission; http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52016DC0534&from=EN
3. Financing SMEs and Entrepreneurs 2017: An OECD Scoreboard, Organization for Economic Co-operation and Development; http://www.keepeek.com/Digital-Asset-Management/oecd/industry-and-services/financing-smes-and-entrepreneurs-2017_fin_sme_ent-2017-en#.WSFwjWgrKiM
4. “Survey Shows SMEs Still Plagued by Late Payments,” Payments Journal; http://www.paymentsjournal.com/Content/Blogs/Industry_Blog/33141/
5. Small Business Exporting Survey, U.S. National Small Business Association and Small Business Exporters Association; http://www.nsba.biz/wp-content/uploads/2016/04/Export-Survey-2016-Final.pdf
6. “5 Reasons Why Obama’s SupplierPay Isn’t Working,” Trade Financing Matters; http://spendmatters.com/tfmatters/5-reaasons-why-obamas-supplierpay-isnt-working/
7. “How to Solve the Extended Payment Term Problem,” Procurious; https://www.procurious.com/procurement-news/solve-extended-payment-term-problem
8. European Payment Report, interim justitia; https://www.intrum.com/en/about-us/publications/european-payment-report/
9. “California Prompt Payment Act,” State of California; https://www.documents.dgs.ca.gov/pd/smallbus/promptpaymentact.doc
10. “Businesses get on board with the Prompt Payment Code,” U.K. Crown Commercial Service; https://www.gov.uk/government/news/businesses-get-on-board-with-the-prompt-payment-code
11. Payment Times and Practices Inquiry – Final Report, Australian Small Business and Family Enterprise Ombudsman; http://www.asbfeo.gov.au/sites/default/files/ASBFEO_Payment_Times_and_Practices Inquiry_Report.pdf
12. “BCA Moves to Avoid Legislation through Voluntary Payment Code for Small Business,” Sydney Morning Herald; http://www.smh.com.au/small-business/finance/bca-moves-to-avoid-legislation-through-voluntary-payment-code-for-small-business-20170528-gwf72n.html
13. Payment Times and Practices Inquiry – Final Report, Australian Small Business and Family Enterprise Ombudsman; http://www.asbfeo.gov.au/sites/default/files/ASBFEO_Payment_Times_and_Practices Inquiry_Report.pdf
14. “Late Payment: Commission Urges 4 Member States to Comply with the Late Payment Directive to Protect SMEs in their Commercial Relations,” European Commission; http://europa.eu/rapid/press-release_IP-17-239_en.htm
15. Payment Times and Practices Inquiry – Final Report, Australian Small Business and Family Enterprise Ombudsman; http://www.asbfeo.gov.au/sites/default/files/ASBFEO_Payment_Times_and_Practices Inquiry_Report.pdf
16. Financing SMEs and Entrepreneurs 2017: An OECD Scoreboard, Organization for Economic Co-operation and Development; http://www.keepeek.com/Digital-Asset-Management/oecd/industry-and-services/financing-smes-and-entrepreneurs-2017_fin_sme_ent-2017-en#.WSFwjWgrKiM
17. “Minimize Late Payments,” Federation of Small Businesses; https://www.fsb.org.uk/resources/minimise-late-payments
18. “Think Twice Before Extending Terms of Payment,” SupplyChainDive; http://www.supplychaindive.com/news/extended-terms-supply-chain-relationship-risk-credit/431005/
19. “EU Late Payment Directive – as Useless as a Fish on a Bicycle,” CTMfile; https://ctmfile.com/story/eu-late-payment-directive-as-useless-as-a-fish-on-a-bicycle
20. “5 Reasons Why Obama’s SupplierPay Isn’t Working,” Trade Financing Matters; http://spendmatters.com/tfmatters/5-reaasons-why-obamas-supplierpay-isnt-working/
21. “Chasing Payments,” Xero; https://vimeo.com/173442672

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