EU late Payment laws – The 3 biggest Impacts on…
We all agree cash flow is critical to business and that late payment is a major problem in the EU. It is very costly, it distorts competition and impacts the weakest link in Supply Chain i.e. the smaller businesses.
In a nutshell late payments lead to increased prices and reduced competition and ultimately, in the worst case, even to business failure.
The EU Late Payment laws are essentially forcing payment term compliance; from a supply chain perspective this is all very fine and it is simply another rule in the game. That is not in itself a game changer for the Supply Chain Financiers.
However, EU has also allowed countries to go beyond simple compliance enforcement and to drive payment term reduction between the Buyer and the Supplier (e.g. Law for the Modernization of the Economy in France for transportation) and while the media spotlight is on the Supplier/Buyer relationship, one critical actor has been left out in the dark: The financier.
So what are the 3 main impacts the late payment laws will have on the Supply Chain Finance providers such as reverse factoring, dynamic discounting, invoice financing or factoring companies?
- The first impact is the reduced opportunity to finance DSOs. Because the potential tenor is simply shorter (payment term reduction) the financing opportunity is reduced. Some SC Financier may find that their less profitable customers are becoming unattractive.
- The second impact is the total amount of funds in use at any point in time is smaller because the cycles are shorter. The financial case for the Buyer to consume its own (cheap) credit lines in order to finance its supply chain can become attractive.
- The third impact is the increased importance of automated invoice processing and approval systems. (This item is particularly relevant for reverse factoring and invoice discounting). A manual approval of invoices over 7 days is acceptable for the financier when payment terms are 75 or 90 days. The same 7 days approval cycle for net 30 days terms is proportionally reducing the financing opportunity for the SC Financier to possibly unacceptable levels.
Of course every financing model will be hit differently; some SC financier may be able to mitigate some consequences thanks to their legal and their financing model but every single one will be hit by this change in the legal environment.