Updated: Mar 24, 2022
B2B trade is the driving force behind the global economy, and enterprises have a responsibility to keep this increasingly complex ecosystem alive. In a constantly evolving digital climate, the need for trust in online payments is greater than ever.
The ability to predict cash flow is key to businesses, as financial stability is the foundation of growth. The 2019 European Payment Report shows that European companies on average write off 2.31% revenue from bad debt losses. The economic impact of late payments is enormous. According to the European Commission, 47% of small businesses and 35% of large enterprises identify late payments is a barrier to growth. SMEs tend to suffer most, since their survival depends heavily on their liquidity. Late payments can result in them having to open up new lines of credit and, in the worst situations, even force them out of the market.
In response to this rapidly growing concern, the EU introduced the Late Payment Directive in 2011. Applying to all member states in the bloc, the directive aims to drive a culture of prompt payment by placing limits of 60 days for businesses and 30 days for public authorities. It also requires debtors to pay interest and any additional recovery costs to creditors if they don’t pay for goods or services within these timeframes.
What drives late payments?
Despite the unprecedented rise of digital transformation and the growing need for trust and transparency, many companies are still reporting late payments. For suppliers, this means they have to be picky about the buyers they choose to work with. At the same time, buyers find themselves under increasing pressure to boost the efficiency of their payment processes. And if they can’t, business relations end up suffering. Still, many have a long way to go to overcome the problem. Here’s why, according to the European Parliament:
- 62% of delayed payments are caused by financial difficulties among debtors. While these factors are much harder to control, they’re often caused by late payments in the first place.
- 48% are caused by intentional delays. For example, Net 30 has long been standard in big business, but Net 45 and Net 60 aren’t unheard of either. Many companies extend payment times as far as they can to earn interest on their funds.
- 45% are caused by administrative inefficiencies in the payment process and purchase orders. Many buyers lack streamlined payment operations, and instead rely on outdated procurement models where information has to be manually entered multiple times in different systems.
SMEs are more negatively affected than most by late payments, but the real problem is even bigger. Sometimes, even a small supplier can be the weakest link in large corporation’s supply chain. But the large corporation can also critically damage a smaller organisation’s ability to survive by consistently paying late. This can end up disrupting the entire supply chain and jeopardise the supplier’s financial stability. As supply chains continue to grow in size and complexity, the problem is only going to get worse.
Can technology offer the solution?
Technology has transformed the way we pay, and a cashless society no longer belongs to the realms of fiction. Yet many payment processes are still fraught with unnecessary corporate bureaucracy, which is often partly caused by inefficient payment processes. As supply chains continue to grow, many procurement and accounting departments find themselves lacking the scalability to onboard and manage supplier portfolios running into the hundreds.
The problem becomes exponentially greater with scale. Large enterprises have thousands of suppliers, the vast majority of which are small to the point they can end up getting overlooked. At a certain point, these supply chains become ungovernable due to their size and complexity. And, when that happens, the whole ecosystem is at risk of breaking down. That’s why payment and procurement need to be