Companies around the world are putting some suppliers onto ‘immediate’ payment terms because they don’t trust their own accounts payable processes, according to new research from Informita, a working capital analytics and consultancy firm.
This is skewing the ‘headline’ overall average payment terms data. The average payment terms in south Asia is calculated at just 18 days, contrary to popular belief, the research has found. But that figure appears to be heavily skewed by the 59% of suppliers in the region that have been put on ‘immediate’ terms by their customers.
“The irony is that just because suppliers are given an immediate payment term does not mean they get paid immediately. In fact, the average days to pay for these invoices averages between 18 and 22 days,” says the report.
The US agreed average is 25 days but 40% of suppliers are on immediate terms. Only part of that 40% is accounted for by payments to utilities where there are penalties for late payment and by payments to federal, state and municipal authorities.
Average agreed terms in Spain are just 20 days, skewed by the fact that 66% of suppliers are on immediate terms.
In East Asia, the headline average payment term is 22 days, but 49% of suppliers are on immediate terms. Africa has the longest average agreed terms at 39 days, a figure that would be considerably worse after allowing for the 37% of suppliers that are on immediate terms.
“This survey establishes without a doubt that many of us do not trust our own companies’ payment processes,” says the report, published on the firm’s TermsCheck.com website. “We set up suppliers on immediate terms thinking we can ‘fool the system’. In actual fact, we are putting enormous pressure on those systems to perform in a way they were not designed for. This places additional and artificial stress on those that are charged with processing the transaction and increases the odds that the process will be seen to fail.”
This discrepancy between what is agreed and what actually happens isn’t doing any favours for suppliers, the report says. “If everyone paid to the agreed payment terms the vast majority of suppliers would be delighted. Although we hear many cases of extended payment terms in different countries, these anecdotes are not backed up by the evidence. For example, in Italy the average agreed terms are 51 days but there is plenty of evidence to suggest that very few are paid on this average term.
“Terms are not the problem. Late payment is the problem and so far no piece of legislation has properly addressed this point.”
The European Late Payment Directive came into force in 2013 and was meant to stop terms of more than 60 days. Informita’s research, however, shows that 13% of agreed payment terms are still longer than that. “So you might say that the Directive has been as much use as a trap door on a lifeboat,” the report says.
Croatia has the longest average agreed terms at 70 days, but the report explains that the country is one of the newer EU member states and that in the early 1990s “there was a lot of barter going on there. So 70 days is probably way better than many might expect.”
Greece at 54 days and Italy at 51 days are ranked next in the list. France was “a big surprise” to be ranked fourth at 51 days. “The French were the first to impose some serious laws on both payment terms and late payment back in 2008 and they made a big deal forcing large French companies to comply. But the reality is that average French payment are still higher than the European average and that 12% of agreed payment terms are still not compliant with French law,” the report says.
“The main reason for this has been poor communication by government and confusion amongst suppliers and buyers… but if you speak to many smaller French businesses there are still many that are not aware of the legislation or who have misunderstood the legislation.” There are similar issues in Germany, too, where it is commonly believed that, as long as both parties agree the term in writing, they can agree whatever they like. “Not true,” says the report.
“Many in the UK and Ireland remain blissfully unaware that legislation exists at all.”
The report concludes: “In Europe we are seeing more and more regulation about terms, charging interest for late payment and reporting payment performance. But very little of this legislation has been clearly thought out or properly enforced. It all points to the likelihood that governments are not going to solve this issue.”