The key issue of payment terms

payment terms
November 19th, 2020
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Because of their sizeable reputational and financial impact on companies, payment terms should not be overlooked in business relationships. Nonetheless, late payments still affect one in three companies, despite increasingly stringent monitoring in France and Europe. The recent publication of the annual report of the French payment terms watchdog (l'Observatoire des délais de paiement) is an ideal opportunity to take stock of the French situation.

Changes to payment terms in France

According to the French Commercial Code, payment terms between professionals are set at 30 days from the receipt of goods or performance of services. These terms may be extended to 60 days (or 45 days end-of-month) from the invoice issue date, if this is specified in the contract between the parties.

Historically, France has not had the best record when it comes to complying with suppliers' payment terms. Indeed, this is the leading cause of bankruptcy among both very small and small- to medium-sized enterprises[1]. To this end, the government strengthened its legislative framework via the Sapin II Law, specifically by raising the maximum fine ceiling to €2 million for legal persons.

With the advent of the health crisis, this topic is now of vital importance to cash flow in companies. For this reason, a payment terms crisis committee was set up during the period, intended to focus on individual malpractice cases and to verify the commitments made publicly by companies. Some time will be needed to fully take stock of this exceptional situation.

State of play regarding payment terms today

The French payment terms watchdog noted that the situation regarding inter-company payments is beginning to settle. Terms are levelling off below the 60-day limit, at 51 days for suppliers, and 44 days for customers. The industry and transportation sectors are seeing improvements, though this is not yet the case for construction.

However, late payments still affect one in three companies, with an average late payment time of 11 days. "If there were no late payments, SMEs and intermediate-sized enterprises would benefit respectively from €19 billion and €7 billion in additional cash," said Alain Griset, Deputy Minister to the Minister of the Economy, Finance and Recovery in charge of Small- and Medium-sized Enterprises.

With regard to the public sector, it has seen mixed results when it comes to its statutory 30-day payment terms: state payment terms averaged 19 days, while those of local authorities, hospitals and local public institutions lost ground slightly, extending to 27 days.

By way of its control policy, the DGCCRF[2], France's General Directorate for Competition Policy, Consumer Affairs and Fraud Control, has a key role to play in ensuring that these payment terms are met. Last year, the body inspected no fewer than 1,517 establishments, finding a discrepancy rate of 31%.

Given the current crisis, structural problems leading to late payments are likely to be exacerbated. It is now more important than ever to strengthen both the channels and means of payment to allow better control of payment terms.

[1] PwC

[2] La Direction générale de la Concurrence, de la Consommation et de la Répression des fraudes

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