Prompt payment

Prompt payment is critical for the cash flow of companies, especially for small and medium enterprises (SMEs). It enables them to plan for future activities and to build stronger long-term relationships with their customers.

Problem statement

Many payments in commercial transactions between businesses or between businesses and public authorities are made later than agreed. Furthermore, as international payments are governed by many differing legislations and practices, companies are frequently exposed to restrictive requirements by the corporations with whom they trade. These can include pressure for deferred payments (between 30 and 180 days) after presentation of documentary credit, or requirements to plan their activities within a fiscal year and comply with set turnover targets.

This leads to serious problems for many companies, especially SMEs, putting their liquidity and sometimes their existence at stake. Another problem resulting from late payments concerns the time and money that businesses spend on collecting overdue debts. According to the European Commission, European businesses spend an estimated €25 billion per year chasing late payments from the public and private sector.

Implementation guidance

Governments should introduce late payment legislation and adopt initiatives to encourage prompt payment on recognized commercial terms. Furthermore, they should undertake initiatives for the protection of SMEs in their relationships with larger clients, by encouraging prompt payment upon fulfilment of contract terms, including contracts established by public sector entities.

An important recent EU Directive on Late Payment sets a general 30-day deadline for paying invoices, and states that only in exceptional cases can this paying period be extended. The Directive also introduces mechanisms that make it easier to claim interests due to the introduction of compensation for recovery costs. For public authorities, paying periods must be no longer than 60 days. This is important given the amount of money that public entities in the European Union spend each year for purchasing goods, products and services from businesses; this amounts to 16% of the EU GDP.
On the business side, ISO 9001:2009 ,"Quality management systems - Requirements", and the accompanying ISO 9004:2009, "Managing for the sustained success of an organization - A quality management approach", cover company commitments on payment practice. It should be verified that the payment system is adequate to fulfil contractual arrangements.
Furthermore, UNECE Recommendation 18 suggests that in order to encourage prompt payment by customers, businesses should consider offering discount for prompt payment. For example, discounts of 1?3% might be offered where payment is made on delivery or 0.5-1.5% where payment is received within 10 days. In addition, it is recommended that dispatch and delivery of the goods should be followed up with a Delivery & Quality e-mail or fax to the buyer/importer/customer emphasising that the goods have arrived, that they meet contract quality specifications, and the seller looks forward to prompt payment by the due date.

References

Useful reading includes:

• EFTA Trader's ABC- Vol.3: Payment, Brussels and Geneva, 1999. This provides guidance on payment procedures and the steps which are required prior to the final settlement of invoices.
• UNECE Recommendation 18 on Facilitation Measures related to International Trade Procedures, covering the payment phase of the supply chain.