EU payment term regulations offer challenges and opportunities

Dynamic discounting provides a path to compliance with payment term reporting requirements while improving supplier relationships, and providing an attractive source of funding to SMEs.

Payment terms and delays increase despite new regulatory efforts

In the C2FO Working Capital Outlook Survey, small and midsize companies in the EU reported a significant increase in the number of their customers imposing longer payment terms. On average, SMEs reported more than a quarter of their clients have extended payment terms. For the U.K. alone, the number of clients imposing longer payment terms on their SME suppliers doubled in the past year.

Not only have payment terms been extended in ways that negatively impact SME supplier cash flow, but SMEs in Germany, U.K., and Italy indicated their customers are delaying actual payments. Unsurprisingly, SMEs also reported concerns about customer relationships as a primary barrier to growth.

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These trends are occurring just as the U.K. and the European Union, have moved to implement regulations that encourage large corporates to publicly report details on how promptly they pay their SME suppliers. The Prompt Payment Code (PPC), administrated by the Chartered Institute of Credit Management in the U.K., reached more 2000 companies as signatories in 2017, including nearly 75 percent of U.K.’s FTSE100.

“Prompt payment can make all the difference to small businesses, boosting their cash flow and allowing them to invest in growth for the future.”

— Margot James, U.K. Minister for Small Business, Consumers and Corporate Responsibility

The code acknowledges that late payments and delayed payment terms have become a normalized part of the payments landscape during and since the financial crisis. It is a reality in today’s financial landscape that large corporates, eager to maximize and maintain their cash positions, are unlikely to change their payment postures soon.

The PPC and other initiatives such as Duty to Report are laudable attempts to advance a solution. Time will tell just how much impact is made. In the interim, some fintech alternatives, including dynamic discounting from C2FO, provide a solution for both SME suppliers and their large corporate customers.

SMEs indicate interest and need for finance alternatives

In the C2FO survey, two-thirds of SMEs noted an increased need for liquidity over 2016, with more than one-third noteing significantly escalated needs. SMEs in Italy indicated some of the highest need in the survey, rivaling that of SMEs in the rapidly growing economies of India and China. The increase in demand aligns to economic recovery and new pressures for growth on SMEs. Access to funding will need to keep pace with this increasing demand.

SMEs are looking beyond traditional finance options to meet their cash flow demand. Seventy-six percent of SMEs in the U.K., Germany, and Italy indicate they are likely to consider finance alternatives. Similarly, these lending platforms experienced a 90 percent compound annual growth in Europe according to Global Partnership for Financial Inclusion.

Among these alternatives, SME suppliers in the C2FO survey demonstrate increasing openness to early payment via dynamic discounting. In fact, 75 percent of those surveyed were at least “somewhat” comfortable with the concept of asking their large corporate customers for early payment in exchange for a discount.

SMEs increasingly demonstrate a preference for doing business with companies that are amenable to offering supplier-friendly accelerated payment options. More than 80 percent of SMEs surveyed agreed with the statement that “when deciding which customers to do business with, it is very or extremely important that your customers offer supplier friendly accelerated payment options.”

Corporates can build better supplier relationships, improve margin, and improve payment term reporting with dynamic discounting

Large corporates interested in protecting and securing their supply chain gain a demonstrable advantage with their suppliers when adopting innovative payment strategies. Further, as dynamic discounting payment is advanced directly to suppliers from the corporate customer, unlike supply chain finance, this program supports compliance with the Prompt Payment Code and other regulatory efforts such as Duty to Report in the U.K.

“We’re pleased that the government has recognised the value of increasing collaboration between corporates and their suppliers in this way because suppliers are incredibly enthusiastic about it.”

— Matt McQuillan, Managing Director,  C2FO

Supply chain finance and p-cards do not impact the payment date by the corporate customer and payment is made from a third-party finance company. As a result, neither of these traditional trade finance options support compliance under the new guidelines.

In summary

Improving access to liquidity and affordable funding for SMEs

  • Fintech solutions like C2FO provide flow of liquidity to suppliers
  • SMEs and their large corporate customers mutually benefit from collaborative and innovative solutions to alleviate uncertainty around payments, contracts and market conditions
  • SMEs gain easy access to affordable capital, when they need it, and report improved relationships with customers offering this option

Dynamic discounting allows corporates to strengthen supply chain, improve reporting, and increase margins

  • Improving access to cash ensures that SMEs can grow and invest in their operations without increasing supply chain risk for their customers
  • Corporates improve margins with negligible effort
  • Dynamic discounting, with its direct payment to suppliers from corporates, improves payment term reporting for regulatory measures such as the Duty to Report