While investors find courage in positive data out of Europe, there’s one development that should give them pause.
A growing number of small businesses in Europe complain they face excessive delays in being paid for their work, with large parts of the sector seeking tougher laws to address the problem.
The 2017 European Payment Report compiled annually by Swedish debt collector Intrum Justitia AB shows that 61 percent of the 10,468 small and medium-sized companies surveyed say they’ve been asked by counterparties to accept longer payment delays than they feel comfortable with. Last year, that figure was 46 percent.
The development is “a growing concern,” Intrum Justitia’s Chief Executive Officer Mikael Ericson said in a phone interview. “This clearly significantly affects both growth and investments in European companies.”
The survey suggests Europe isn’t living up to its goal of protecting smaller companies from the liquidity issues they face when payment doesn’t arrive. In adopting the Late Payment Directive in 2011, the EU said Europe’s whole economy is “negatively affected by late payment” and that “for Europe’s valued SMEs, any disruption to cash flow can mean the difference between solvency and bankruptcy.”
A large number of firms surveyed said they want tougher payment rules to combat what Intrum Justitia describes as a “deteriorating payment culture.” Some 40 percent of businesses would welcome new legislation while about 30 percent want new voluntary-based codes of conduct.
According to the Late Payment Directive, enterprises have to pay their invoices within 60 days “unless they expressly agree otherwise and provided it is not grossly unfair.” Public authorities have to pay for the goods and services they procure within 30 days (or in very exceptional circumstances, 60 days). But the public sector stands out for particularly slow payment of its bills, according to the survey.
The European public sector’s average payment time rose to 41 days in the 2017 survey, from 36 last year. In Greece, the average payment time for public authorities is 103 days while in Italy and Portugal, it’s 98 days. Ericson says those numbers “should be troubling news to European governments, as their own authorities hinder efforts to stimulate growth and job creation.”
The survey also indicates that low interest rates have lost their effectiveness. Only 13 percent of firms surveyed said low borrowing costs have led to an increase in their investments, with 81 percent reporting no change.
With four out of five companies saying low rates aren’t encouraging more investment, it’s now all about cash flows, according to Ericson. “Ensuring stable cash flows early on” is now “more important” than investing in growth, he said.