How the European Late Payment Directive Will Effect Business in the UK
The European Late Payment Directive generally increases the restrictions under which businesses can make late payments to their creditors. This will force businesses to get their payment cycles under control before the ELPD goes into effect on 16th March 2013. The effect of the ELPD varies according to the specific location of businesses within the UK.
The Late Payment of Commercial Debts Act 1998 already imposes an interest rate of eight percent above base for late payments unless the parties agree otherwise. The ELPD adds the following restrictions:
- Generally requires a business to make payment to a creditor within 30 days of the receipt of goods or services.
- May allow a business to extend the payments to 60 days under some circumstances.
- Both parties may agree to longer payment terms if they are not grossly unfair to the creditor.
Any contract that does not comply with the ELPD is unenforceable, which may cause the creditor to make a claim for damages against the business.
Many businesses in the UK are in a late payment cycle in which they receive late payments from customers, which requires them to make late payments to their suppliers. Bibby Financial Services has conducted a recent survey showing that 1/3 of responding businesses have accepted late payment terms from their customers in the past year. This cash flow gap has forced 36 percent of businesses to make late payments to their suppliers.
Businesses currently have less than a year to get their payments under control before the ELPD goes into effect. They will be in non-compliance with ELPD if they are currently making payments more than 60 days in arrears, which places significant pressure on these businesses to get their books in order. Twenty-one percent of surveyed businesses currently pay more than 60 days late as a matter of course.
Geographical location seems to play a significant role in the effect of late payments on businesses. Firms in the South tend to keep the same payment agreements, including East Anglia, the South East and the South West. Firms in the North such as Humberside, East Midlands, the North East, the North West and Yorkshire have often accepted late payment terms from customers.
The ELPD will affect firms in Wales the most. Forty-nine percent of these businesses report having their payment terms extended in the past year, compared with 23 percent for South East England.