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Supply chain finance industry hopeful EU will soften late payment rules

Trade bodies have warned that EU reforms tackling late payments could make it unviable for banks to support supply chain finance (SCF) facilities, increase costs for SMEs and limit access to trade credit insurance. 

The European Commission proposed in September to limit all payment terms to a maximum of 30 days as part of revisions to the EU-wide Late Payment Directive, finalised in 2011. 

Under the draft reforms, there is no longer an option for commercial parties to agree on longer terms. If a payment is missed, interest of 8% is added to the amount due as well as a flat fee of €50. 

“This has caused some alarm in the industry,” says Sean Edwards, chairman of the International Trade & Forfaiting Association (ITFA). 

“There is a feeling it is quite short-sighted and potentially counterproductive, as there are a number of reasons why this could be very harmful for SMEs, and not just SME suppliers but SME buyers as well,” he tells GTR. 

Currently, SCF programmes are widely used in Europe. Programmes can be buyer- or supplier-led, but generally work by using a third party – such as a bank or fintech – to pay a supplier earlier while giving the buyer longer to pay. 

A study by Lendscape and BCR estimates that the volume of SCF in use in Europe reached US$534bn last year, rising by almost a fifth compared to 2021. 

But Techniek Nederland, a Dutch trade body representing technical service providers, warns the EU’s proposals “will cut off supply chain financing, taking away a positive form of finance that fills the gap for companies who struggle to find affordable traditional bank finance”. 

“This proposal will have a significant impact on the competitiveness of one of Europe’s essential ecosystems and its contribution to local jobs and communities,” it says in a response to the Commission’s consultation on the reforms. 

The Danish Chamber of Commerce adds that SCF programmes are “the cheapest financing entrepreneurs and SMEs can get”, but will become “impossible” if the EU reforms are not adjusted. 

That is because funders of programmes would see their returns slashed if terms were shortened, Edwards says. 

“If banks can’t make a reasonable return from this business, because everybody has to keep payment terms to 30 days, then a lot of the liquidity will dry up,” he says. “The general feeling is that the regulation would remove a lot of the incentive for banks to get involved.” 

If SMEs are forced to turn elsewhere for financing – a challenge in itself – the costs incurred could be steep. 

Richard Wulff, executive director of the International Credit Insurance & Surety Association (ICISA), says calculations from one of its members suggest as much as €2tn of additional financing would be required to plug the gap if SCF is withdrawn. 

“It is questionable whether this amount of additional financing would be available and is sure to have a detrimental effect on the price of financing,” he tells GTR. 

The withdrawal of financing options could also hold back the introduction of ESG metrics across supply chains – an increasingly popular tool, whereby suppliers are financially incentivised to reduce emissions, cut deforestation or meet other agreed targets. 

“You need to have well-funded supply chains to encourage participation in ESG programmes,” ITFA’s Edwards points out. 

“The main feature of these programmes is normally that suppliers can get a discount on their margin, but you need to have some sort of monitoring functionality in place. That comes at a cost, and is often going to be funded by the banks.” 

There are also concerns beyond financing. The German Insurance Association (GDV) says a strict requirement to keep payment terms within 30 days would “limit the insurability of accounts receivable in trade credit insurance”. 

Insurers may no longer be legally allowed to extend insurance cover for the future supply of goods – common practice in the German market – meaning cover would not apply if the buyer fell into financial difficulty, GDV says. 

A further complication is for SMEs that find themselves facing late payment, notes Edwards. 

“Late payments are still probably inevitable, and you can imagine that from a commercial point of view, a small supplier is not going to want to beat up its buyer by demanding 8% interest. Maybe the buyer will pay that once, but that could be the end of the relationship.” 

ICISA’s Wulff adds it is “unclear… whether companies would actually report late payments with the risk of negatively influencing commercial relationships”. 

Lobbying by industry groups is underway in Brussels. The proposals face several rounds of potential amendments and negotiation, including by the European Parliament and Council.