B2B Payment Terms: Get the Lowdown in 5 Minutes

Mastering timely supplier payments is an ongoing obsession in the business world. But in the challenging landscape of 2023, where cash flow is under siege, the stakes are higher than ever. With strict regulations and consequences for non-compliance, understanding B2B payment deadlines is crucial. Get ready for a complete breakdown of what you need to know and discover savvy strategies to stay in the cash flow game.

1 – Mastering B2B Payment Rules: Stay Ahead of the Game

In the world of B2B transactions, payment terms play a crucial role. While Buy Now, Pay Later has gained popularity, it's essential to navigate the European landscape while adhering to the law. To combat potential abuses, legislators have crafted a framework requiring professionals to honour supplier invoices. Let's unravel the European Late Payment Directive, designed to revolutionise payment practices.

1.1 – Unveiling Payment Terms Between Businesses in Europe

When it comes to payment deadlines between businesses, the European Late Payment Directive takes the spotlight. This game-changing directive sets the stage, ensuring fair and timely payments across the continent. While businesses enjoy some flexibility in choosing their terms, they must dance to the rhythm of the directive's provisions.

1.2 – B2B Payment Deadlines: The Legal Framework

Let's delve into European law's precise regulations for payment deadlines in B2B transactions, excluding specific industry sectors. Three options await you: the default payment period, the negotiated timeframe within legal limits, and lastly, payments through instalments. Get ready to navigate the legal landscape and discover the optimal payment terms that keep your business thriving.

1.2.1 – The European Late Payment Directive: Overview

The European Late Payment Directive, implemented to promote fair payment practices, sets guidelines for payment deadlines in business-to-business transactions. It aims to establish permissible deadlines for invoicing between professionals. These regulations are incorporated into the relevant articles of European member states' commercial codes.

1.2.2 – Deadlines: When Payment Is Not Stated

If a contract doesn't state a specific payment period, clients have 30 calendar days to settle the invoice after any of these events occur: receiving the supplier's invoice, receiving the goods or services, or accepting and verifying the goods or services as required by the contract. From receiving the invoice to verifying goods and services, public-to-business transactions are also bound by strict rules, with an obligation to settle payments within 30 days.

1.2.3 – Deadlines: Agreed Timelines

When both parties have set a specific payment window, typically around 60 calendar days to settle the invoice, it's crucial to stick to the agreement. However, flexibility is key, as long as any modifications are fair to the supplier and don't unfairly burden them.

1.2.4 – Unlocking Flexibility: Instalment Payments

The European Parliament has given the green light for instalment payments. However, late payment in agreed instalments still comes with a price. Interest charges apply, but only to the instalment amount, not the whole invoice amount.

1.3 – Where to State Your Payment Terms for Smooth Payments

Don't leave payment deadlines to chance! With legal consequences looming, it's crucial to keep B2B clients informed about when invoices must be settled. Give your business an edge by including clear payment terms in your rock-solid General Terms & Conditions (GTC) and boldly highlighting them on every invoice. Get the upper hand in your financial dealings and ensure smooth sailing by putting your payment terms front and centre.

2 – Consequences and Solutions to B2B Payment Delays: Know Your Rights!

Late payments between businesses can have serious repercussions. The European Late Payment Directive sets maximum payment delay terms and penalises for non-compliance. Let's explore the financial sanctions you need to be aware of.

2.1 – Legal and Financial Penalties: The Price of Non-compliance

When payment deadlines are not met, the law imposes various measures to enforce compliance and discourage delays.

2.1.1 – Hitting Where It Hurts: Applying Interest

If a purchaser defaults on payment, suppliers can charge interest set at 8% above the reference rate or the Central Bank's base lending rate. Non-Eurozone countries can refer to their national central bank rate. For example, in England, it's the Bank of England's Base Rate that sets the tone.

2.1.2 – €40 Penalty for Every Late Invoice

No more playing games with late payments! The directive ensures suppliers get compensation from defaulters. They're entitled to a minimum statutory lump-sum indemnity of €40, but don't mess around because they can claim even higher recovery costs, like lawyer fees or debt collector expenses.

2.2 – Amicable and Legal Recovery Procedures

When a payment deadline is ignored, businesses mean business. From friendly reminders to amicable negotiations, companies have a strategic arsenal to recover payment as quickly as possible. A company should analyse the underlying cause of the payment delay or non-payment and collaborate with its client to salvage the relationship while safeguarding their interests (cue the repayment plan!).

But if push comes to shove, enter the heavyweights: specialised agencies and judicial officers. They assume responsibility for handling the dispute and initiate legal actions if necessary. These procedures ensure that businesses have recourse to effective recovery measures when faced with payment defaults.

3 – Challenges Faced by European Businesses in B2B Payment Deadlines

European legislation aims to streamline inter-business relationships and prevent abuses by establishing rules for payment deadlines for goods and services. However, cash flow difficulties persist and payment delays remain a significant cause of business failures across Europe.

3.1 – Lingering Issues With Payment Deadlines in B2B

Industry reports indicate that payment delays continue to plague European businesses. On average, it takes companies in Western Europe 45 days to collect payment – a mean delay of 16 days.

As the tide of inflation rises in early 2023, businesses are caught in a whirlpool of cash flow challenges. The pressure to meet payment deadlines grows stronger, despite legal penalties. It's a high-stakes balancing act between staying afloat and sinking under the weight of financial constraints.

3.2 – Why Do B2B Payment Delays Complicate Working Capital Management?

Tech SaaS companies and intermediary platforms find themselves in a tight spot when financing working capital requirements (WCR). They rely on small independent suppliers who demand swift payment for their services. However, their end customers, often big players in the industry, struggle to settle invoices promptly. It's like navigating a scissor's edge, hindering growth and depriving these businesses of the cash infusion they need to fuel their development.

3.3 – Aria: Unlocking Financial Power for Digital Companies

In the digital landscape, working capital requirements (WCRs) require more than traditional financing methods. Factoring contracts or bank loans simply don't fit these businesses' bespoke, sometimes sporadic needs.

That's where Aria steps in, the disruptor of embedded finance. Wave goodbye to complex factoring contracts and outdated bank loans. Aria's cutting-edge solution is seamlessly woven into SaaS and marketplaces, fueling digital enterprises with lightning-fast cash advances for supplier invoices.

A Use Case for B2B Marketplaces and DSPs: Retain and Grow Your Vendor Network with Aria's Invoice Financing

• You are: a Freelancer Marketplace, a B2B Marketplace or a Digital Service Provider (DSP) and you aim to grow your vendor/talent portfolio and improve retention.
• Use Case: Marketplaces and DSPs often face cash flow issues due to pairing smaller vendors with larger clients that have longer payment terms. Upon mission completion, a vendor/contractor/talent on your platform can either wait for the client's payment (which can extend up to 60 days due to complex invoicing procedures of larger companies) or opt for instant payment with Aria's embedded financing solution.
• Benefits:
  • Increase Acquisition Rate: Attract more vendors to your platform with the promise of immediate payments.
  • Boost Vendor Retention: Encourage vendors to remain on your platform with the incentive of instant payments.
  • Grow GMV: Facilitate higher-value transactions that were previously hampered by extended payment terms.
  • Prevent Cash Shortages: Aria bridges the gap, financing vendors until your clients clear the invoices.
• Implementation: Integrate Aria into your platform via an API (though initial manual testing for a few financing requests is also possible). Aria's solution can be implemented as a white-label or branded API integration. Risk assessment is conducted ahead of the contract, considering factors like clients, vendors, and average GMV calculations.

Balancing legal compliance, supplier satisfaction and boosting working capital seems like squaring the circle. However, when you understand B2B payment deadlines in Europe, you unravel business growth.