Failure to to observe contractual terms of payments

Systematic late payment is emerging as a normal optimal method of financial management by individuals, firms and public institutions. The deterioration of payment behaviour weakens the whole economy. Excessively long payment periods, even if they are agreed between the contractors, constitute a risk for business. The consequences of late payment can be immensely time-consuming and can play havoc with cash flow.

Late payment has always existed as a result of disputes over the seller's performance of the contract, particularly as regards the quality of the product or the service rendered. Such delays are inevitable. Many other delays can be ascribed to poor organization, both of suppliers' invoicing and collection operations and of purchasers' systems for settling bills.

Most corporations and every business organization acknowledge the severity of the overdue payment problem that has become endemic in Europe. Each year it results in the bankruptcy of many smaller enterprises due to cash flow problems.

Normal contractual terms of payment vary within countries by sector. Averages for selected countries are: Germany 10-30 days; Denmark, Netherlands, UK 30 days; Belgium, Portugal 30-60 days; Greece, Spain, France 30-90 days; Luxembourg 90 days; Ireland, Italy 30-120 days. Actual payment periods generally exceed contractual terms. In practice, although a contract may stipulate 30 days, this period will run only from the month following the registration of the invoice giving an actual period of 60 days. Actual "delays" come on top of "accounting delays".

Late payment is especially problematic for small firms who seldom have access to outside finance. Large firms are often accused of taking advantage of their strong bargaining position in relation to small suppliers by dictating longer and longer payment terms and paying their bills late. In periods of economic recession it has been known for large firms to confront their suppliers with a unilateral decision extending their payment term considerably. Small firms can thus find themselves financing larger ones. It has been estimated that in France inter-company credit grew by an annual average of 15% between 1967 and 1988.