Europe is considering 30-day maximum payment times for SMEs. Here’s why Australia says no

It’s a familiar problem: major companies take too long to pay their smaller suppliers, damaging their cash flow and increasing the likelihood of business failure.

But the European Parliament is taking a vastly different approach to Australian lawmakers, arguing a hard 30-day time limit on invoice payments is the way to protect small businesses.

Its internal market committee last month endorsed a proposal to establish maximum payment times for B2B and government-to-supplier payments, in an effort to bolster SME cash flow.

If the plan is formally adopted, interest will automatically apply to overdue payments, with individual governments free to launch investigations and issue sanctions against egregious late payers.

The proposal would supersede a 2011 EU directive combating payments, which reviews have deemed inadequate and lacking in effective enforcement and redress measures.

The economic benefits of faster payments would be enormous, the European Commission argued last year.

“A one-day reduction in payment delays would increase EU companies’ aggregated cash flow by 0.9% and could save them €158 million (AU$259 million) in financing costs,” it said.

On paper, the problems facing European small businesses closely mirror those in Australia.

“In the EU, on average, one out of two invoices in commercial transactions are paid late (or not at all),” the European Commission said.

“Late payments increase in times of crisis and economic turmoil. SMEs, who rely on regular and predictable streams of cash to operate, are more vulnerable to the risk of being paid late and to its damaging effects.”

And, like the European Parliament, the Australian government is reworking its plan to speed up payment times, after a review found the current system lacking.

The 2023 review, conducted by esteemed economist and former competition and small business minister Dr Craig Emerson, levelled 14 recommendations — all of which were adopted by the federal government.

But a hard payment times limit was not among those recommendations.

Mandating a maximum payment time would “create problems that would overwhelm its usefulness and do more harm than good for small businesses,” Emerson found.

Such a limit — and its attendant penalties — could disincentivise big business procurement from smaller suppliers, increase the use of supply chain finance to meet short payment times, and reduce the uptake of eInvoicing, he found.

In addition, a hard time limit could incentivise today’s best-performing businesses, that pay their invoices promptly, to slow down.

“A single mandated payment time would damage the viability of some industries, while multiple mandated payment times would be complex to implement for small and large businesses operating across multiple industries,” Emerson found.

The review recommended strengthening the existing Payment Times Reporting System, and its main data dashboard, which effectively names and shames the worst performers.

The federal government is expected to move on those recommendations shortly — and small businesses may be able to watch the European Union for an alternative course of action.