The 2011 EU directive which has been adopted by 27 out of the 28 member states, sets limits on how long public and private sector companies can keep their suppliers waiting – 30 and 60 days respectively.
Intrum Justitia, the leading credit management group in Europe, in their in depth annual survey of 10,000 businesses in 31 countries in Europe plus Turkey and Russia, published in May 2014, see, concluded that:
- In 18 of the 31 European countries surveyed, loss of income due to late payments has either worsened or at best stayed the same level as last year
- in 20 countries surveyed, respondents said liquidity is being squeezed as well. 50% of respondents said that late- and non-prohibited the growth of their company.
Large companies are borrowing off smaller companies
Extending payments terms by large companies is, in effect, borrowing from their suppliers who are often small businesses. Payment terms longer than 60 days is prohibited by the EU Directive, see above, but the UK’s Daily Telegraph (telegraph.co.uk) reports that “Diageo, the owner of Guinness and Johnnie Walker whisky, has warned suppliers that it plans to take three months to pay its bills”. The Forum of Private Business (FPB), which uncovered the letter, said it was “very concerned” by Diageo’s actions and would complain to the Government. It warned such behaviour “threatens to break the backbone of the British economy – small businesses”.
A well known corporate treasury consultant in Europe, commented: “Why are they doing this at all? And why now, when funding is so cheap and will be for years? ”
Not only this, changing payment terms like really affects the buyer-supplier relationship. It is all very well providing some form of early payment discount service, which does, as Tungsten Network pointed out in a recent e-mail to their users, offer several benefits:
- you finance only the invoices you choose, at a time you choose
- flexible pricing dependent on your customer and the remaining invoice duration
- costs are lower than many factoring solutions
- free of additional fees, compared with numerous fees and charges imposed by traditional banks
- the risk of payment from your customer moves to Tungsten
- your customer won't know if you choose to take early payment on specific invoices
- quick and easy online registration and invoice financing process
- take confidence doing business with Tungsten Bank, regulated in the UK.
But it doesn’t remove the fact that the supplier is being paid later. What is Diageo doing to the health of their supply chain?
How to have a healthy supply chain
EDF, in France, have been operating a supply chain finance programme since 2011. They have NOT extended their payment terms; they just offered their key, vital suppliers full flexibility on whether they make use of the early payment SCF option or not. Suppliers opting to take early payment usually receive it within 48 hours. One of EDF's main objectives was to ensure that they remain a preferred customer for these suppliers. For more details, see.