The EU Late Payment Regulation – unintended consequences for structured finance transactions?

The European Commission published a proposal for a regulation on combating late payment in commercial transactions last year which will introduce new rules, including that payments have to be made within 30 days, albeit with some limited exceptions.  Other key changes include the automatic imposition of interest on a late payment and compensation fees together with enforcement and redress measures. Whilst desirable to consider measures that will foster small and medium sized enterprises, these could have unintended consequences.  A stricter regime could limit freedom of parties to negotiate contractual terms and have a detrimental impact on supply chain and trade receivables financing transactions, as well as the wider market. We analyse below the possible impact of the proposals on the structured finance market and compare the proposals with what is in the pipeline for the United Kingdom.


On 12 September 2023, the European Commission published a proposal for a regulation on combating late payment in commercial transactions (Proposed Regulation).  The Proposed Regulation will replace the Directive 2011/7/EU (Late Payment Directive) dated 16 February 2011 and address perceived flaws relating to late payments.  The European Parliament has proposed changes in an amended text1 (Amended Text), reflecting to some extent concerns raised in response to the initial proposal.

There is a broad consensus amongst regulators, including in the EU and the UK, of the need to foster small and medium-sized enterprises, including micro-enterprises to the extent applicable2 (SMEs). The Proposed Regulation forms part of a package of measures3 aimed at promoting SMEs and entrepreneurship by addressing the negative impact that delayed payment has on an SME and, given reverberations on supply chain, the broader economy; additional financing costs associated with delayed payments creates a domino effect that can lead to bankruptcy and create a lack of confidence in the market. The Proposed Regulation does not, however, expressly contemplate the potentially negative consequences of its proposals for the structured finance market, such as implications for supply chain and trade receivables transactions, as we discuss in more detail below.  

Unlike the earlier Late Payment Directive, the Proposed Regulation will be directly applicable across all EU Member States, thus ensuring consistency of provisions, albeit with some flexibility in certain areas relating to enforcement bodies, dispute resolution mechanisms and financial digital literacy. It will also be open to EU Member States to adopt stricter provisions.

What will the Proposed Regulation change?

The drafting of the Proposed Regulation aligns closely with the current Late Payment Directive. We highlight key proposed changes below, taking into account where compromise proposals have been made by the European Parliament in the Amended Text.

  • Maximum payment term of 30 days. A maximum payment term of 30 calendar days for all “commercial transactions” is introduced in the Proposed Regulation4.  The current requirements are 30 days in “business-to-business” transactions which can be extended if not grossly unfair; the European Commission has observed that smaller creditors often feel compelled to accept longer payment terms of 120 days or more. Payments are required from the date of the receipt of the invoice or request for payment by the debtor, provided that the debtor has received the goods for services5.  As under the current Late Payment Directive, payments can still be made in scheduled instalments; this is expressly subject to the rules for late payment and so it is likely that the intention is that the scheduled payment periods in respect of each instalment cannot be more than 30 calendar days but it is not clear whether such 30 day period would run from each instalment.  The Amended Text proposes possible derogations to the 30 day term: in commercial transactions between undertakings, the parties may agree a payment term of up to 60 calendar days and for transactions in the retail sector involving the purchase of certain slow-moving and seasonal goods, the payment period may be extended to up to 120 calendar days.
  • Prohibition of restrictions on assignment.  Of interest is a proposal in the Amended Text to prohibit provisions excluding or limiting the right of the creditor to make assignments of the credit to third parties for the purpose of accessing financing services.  If adopted, this would be helpful in financing transactions where restrictions on assignment can be problematic.
  • Interest and penalty fees.  Interest (remaining at +8% above the relevant Central Bank reference rates) which accrues daily and compensation fees (now EUR 50 (or equivalent) instead of EUR 40 (or equivalent) per commercial transaction) will be payable automatically per invoice (not per contract).  The Amended Text proposes including a fee of EUR 50, for each commercial transaction of a value between 0 and EUR 1 500, EUR 100 for each commercial transaction of a value between 1 501 and EUR 15 000, and EUR 150 for each commercial transaction above 15 000 EUR, with clarification that a creditor shall not waive its right to obtain interest for late payment if the debtor is a public authority or a large undertaking.
  • Void and prohibited practices.  Any arrangement for waiver of rights to claim interest or compensation will be void where the debtor is a public authority or large undertaking.  Various potential practices, as expanded upon in the Amended Text, which could circumvent the impact of the legislation will be prohibited including for example, extending the duration of the procedure of verification or acceptance or intentionally delaying or preventing the moment of sending the invoice. The recitals to the Late Payment Directive already express a clear desire that exclusions of the right to charge interest should always be considered grossly unfair and that the exclusion of recovery costs should be presumed to be grossly unfair, so the new proposals might not come as a surprise. The strict 30 day payment period also now limits the ability of debtors to obtain additional liquidity via late payment terms which had been considered to be abusive.
  • Stricter verification and acceptance procedure.  A stricter verification and acceptance procedure is proposed and may be provided for by EU Member States only where strictly necessary.  Where this applies, details of the process must be included in the contract and not exceed 30 calendar days from the date of receipt of the goods or services, even where received prior to the invoice or request for payment.
  • Enforcement and redress measures and Observatory of Late Payment.  These include the establishment of enforcement authorities with the power to investigate complaints and impose sanctions. The use of alternative dispute resolution is to be promoted. The Amended Text proposes detailed reporting requirements for undertakings and more details of the an Observatory of Late Payment to be established by the European Commission (Observatory) which shall monitor both timely and delayed payment practices, collect and share expertise, identify best and potentially harmful practices and evaluate the effectiveness of enforcement authorities in carrying out their tasks, with a view to providing the European Commission with advice and expertise to enable it to understand and shape the evolution of payment and late payment practices.
  • Transparency and awareness.  Measures for transparency and raising awareness for remedies for late payment are included.  In order to improve financial literacy, EU Member States will make available credit management and financial training for SMEs.  The Amended Text includes more detail, requiring factoring and financing services training to be offered along with invoice management tools.

What transactions are within scope?

There is no grandfathering for existing contracts; any commercial transactions carried out after the Proposed Regulation comes into force shall be subject to the new rules, including when the underlying contract was concluded prior to that date.  The Amended Text proposes that the current Late Payment Directive can continue to apply up to 24 months after the entry into force of the Proposed Regulation where micro-enterprisesand self-employed are debtors.

Expressly excluded from scope are consumer transactions, payments for damages (including from insurance companies, though the Amended Text proposes that some insurance contracts are included7) and certain payments made in the context of insolvency or restructuring proceedings but what constitutes goods and services could benefit from further clarification. Unlike the Late Payment of Commercial Debts (Interest) Act 1998 ( (the UK Late Payments Act) in the UK, there is no carve out for contracts intended to operate by way of mortgage, pledge, charge or other security.

The Proposed Regulation is silent as to whether transactions governed by the laws of a non-EU Member State could be within scope however the Explanatory Memorandum to the proposal implies that only those transactions that are governed by the laws of a Member State are in scope, as it refers to  the risk of  companies choosing the laws of a non-EU Member State to govern their payment terms.

What is the impact of the proposals on the market and for securitisation and structured finance transactions in particular?

  • An unfortunate result of the European Commission’s desire to prevent abuse of freedom of contract to the detriment of SMEs is that parties to commercial transactions will be prevented from freely agreeing payment terms to suit their transactions, even when commercially desirable for all parties to suit a particular structure.  In fact, as pointed out by the European Economic and Social Committee (EESC)8 the private sector is often better at making timely payments than the public sector and the public sector should be encouraged to make timely payments.  There are often good reasons, why commercial parties may wish to extend payment periods or to waive or vary interest payments altogether.  The Amended Text provides that EU Member States shall introduce measures to permit offsetting amounts by creditors with public authorities.
  • Buyers could be forced to borrow in order to fund gaps between purchases of raw materials and their own supply of goods to comply with the proposed payment period; for example in the agriculture business it is customary that suppliers agree to very long payment terms to allow farmers to pay once they have sold the harvest – if payment is required before the goods are sold this creates a new level of commercial risk.  Whilst the proposed extension to 120 days may be helpful for some businesses  it may not cover all scenarios and restrictions on freedom of contract could be a hindrance.  Similarly, there will be additional disparities of risks for transactions involving goods requiring a longer verification period than that permitted by the Proposed Regulation. Longer verification and acceptance procedures may be desirable for both parties to a transaction, without which it might not be feasible to conclude a transaction thus hampering growth.
  • Restrictions on the ability to contract freely could be disruptive to the business models of firms involved throughout the chain in factoring and supply chain finance.  Supply chain and trade receivables transactions are used by suppliers to manage payment flows, working capital and liquidity, including providing financing for delayed or longer payment periods or mismatches in funding. If all EU trade receivables contracts with undertakings can never be more than between 30 and 60 calendar days, this could restrict the availability of such funding resulting in a negative impact on SME cashflows and liquidity. It is therefore conceivable that more businesses could fail if they are unable to negotiate longer payment terms, thus adding to systemic risks of the current market.
  • Mismatches in payment term periods between accounts payable and receivable throughout a supply chain could be exacerbated. SMEs buying in the EU and exporting outside of the EU will be particularly badly affected. The European Commission discusses this in the Explanatory Memorandum and believes that “trade finance solutions significantly limit the impact of the introduction of a mandatory cap on payment terms”. This does not factor in any potential detrimental impact of the Proposed Regulation on the trade finance industry. For example, the market could be impacted by a reduction in the number of transactions for which suppliers will require financing; if deal volume is reduced, then overall costs for those who continue to require these services could be increased.
  • At best the Proposed Regulation will increase overall transaction costs and at worst this could significantly hinder some areas of a market which is already subject to a number of challenges, such as the securitisation market for trade receivables which is already subject to heavy regulation.
  • Whilst there is a clear benefit to an SME in being paid on time, SMEs will also be subject to the requirement to pay in a period between 30 and 60 calendar days and will suffer disproportionately to larger enterprises if obliged to pay automatic interest and the fixed penalty.
  • Although aspects of the Proposed Regulation are expressed to be automatic there will be additional administrative and other costs for suppliers and debtors of adapting to the new requirements, for example, following up on payments and interest due, and amending documentation and invoices.
  • As noted by the EESC, confidential and sensitive information may be a concern as this needs to respected by enforcement  authorities who should be independent and objective.
  • The Proposed Regulation adopts a number of terms and provisions which are based on the Late Payment Directive but, unlike the legislation adopted in various EU Member States, including the UK at the time, does not further elucidate on various terms and therefore contains a number of ambiguities that would benefit from clarification.

Can transaction parties mitigate funding risks and costs arising from the Proposed Regulation?

Inevitably, parties will consider any options available to cover any additional costs resulting from the Proposed Regulation, although ability to do this will be limited by restrictions on waiving obligations.  It is not clear to what extent any arrangement under which a supplier is effectively charged the cost of receiving payment within the statutory maximum period risks being incompatible with the rules. Even if it were compatible, this could increase overall costs for suppliers.

Parties might also prefer to elect for a law of a country that is not an EU Member State where possible, and which allows for longer payment terms in commercial transactions. As discussed above, it is not clear from the current drafting to what extent the Proposed Regulation is limited only to commercial transactions governed by laws of  EU Member States or whether public policy would require that, notwithstanding a choice of law of a non-EU Member State, but for that choice, the applicable law would otherwise be the law of an EU Member State.  The EESC highlights that this is something that should be avoided.

Ultimately, parties may prefer to contract with non-European suppliers and debtors to ensure that they are subject to a contract with a governing law which allows more flexibility and freedom of contract rights.

What is the position in the United Kingdom?

In the UK, the UK Late Payments Act aligns with the current EU requirements, having been amended from time to time, including for the Late Payment Directive. The UK Late Payments Act provides for payments to be made within 30 days for public authorities or 60 days for business transactions. A period longer than 60 days may be agreed for business transactions provided that it is fair to both businesses.

On 2 October 2023, the Department for Business and Trade announced future measures to tackle late payment of invoices to support SMEs and grow the economy, expressing similar concerns to the European Commission. Proposed measures were published in the Payment and cashflow review report 2023, and in the UK Government’s  Autumn Statement, delivered on 22 November 2023, the UK Chancellor announced that: “Alongside publication of the Payment & Cash Flow Review Report and action taken through the Procurement Act, the government will lead by example in introducing more stringent payment time requirements for firms bidding for large government contracts. From April 2024, firms bidding for government contracts over £5 million will have to demonstrate they pay their own invoices within an average of 55 days, tightening to 45 days in April 2025, and to 30 days in the coming years.

Importantly for the structured finance market, the Autumn Statement raises the possibility of a trickle-down effect, reducing payment periods across the market more generally.  It is however interesting that the Statement refers to firms “demonstrating that they pay their own invoices…” within the shortened payment period, rather than requiring the contract to specify that shorter timeframe.  Accordingly, it seems to leave open the possibility that firms may be able to satisfy the new payment time requirements by using supply chain finance arrangements to meet the payment deadlines, without impacting on the underlying contract terms.

Aside from the above, there is no indication, for the moment at least, that the UK will adopt stricter measures on payment times more generally for private commercial transactions.  New measures announced in the future review include:

  • Increasing transparency by extending the Reporting on Payment Practices and Performance Regulations 2017, so that information about invoices, including late and disputed payments is more visible and easier to analyse; this corresponds with EU proposals evidencing the desire for more monitoring and transparency as to business practices;
  • More active and efficient delivery and enforcement by introducing primary legislation to enable the Small Business Commissioner to investigate and report on the basis of anonymous information and intelligence, with closer integration with other policy and enforcement functions.  Non-compliance could be subject to negative publicity and ultimately a fine.  As digital technology develops, there are proposals that Companies House will identify which companies must comply with reporting requirements.  The EU has a similar approach with its proposal for the establishment of enforcement authorities, with significant powers, and could result in investigations based on confidential information;
  • Improved information and awareness, providing more advice and resources to small businesses on negotiating better payment terms and using digital technology to improve cash flow management as well as more international co-operation for sharing good practice.  Again, this aligns with the direction of travel in the EU;
  • Improving the payment culture by encouraging prompt payment (including a requirement that signatories to the Prompt Payment Code9 reaffirm their adherence every two years), promoting digitalisation and embedding prompt payments into environmental, social and governance programmes.  As discussed above, payment terms for the UK Government procurement and public sector performance, will be strengthened by the Procurement Bill.  This does not go as far as the EU proposals with the strict payment timeframe for both private and public transactions but instead aims to incentivise prompt payment.

To the extent that the UK does not follow the same path as the EU, this will be another area of UK-EU divergence which businesses involved in cross-border trade will have to manage in their day-to-day operations.

Next steps

The European Parliament and the Council of the EU must agree on the final text of the Proposed Regulation before it can be published in the Official Journal of the European Union and enter into force.  This is unlikely to happen until after the elections for the European Parliament in June 2024.

It is anticipated that the final rules will become effective one year after entry into force (although the Amended Text increases this to 18 months with a possible further deferral by 12 months for micro-enterprises), giving time for businesses to adapt to the changes.  The new rules will be reviewed by the European Commission within four years. The EU Payment Observatory is likely to assist in monitoring data on an ongoing basis.

In the UK, some measures addressed in the Payment and cashflow review report 2023, will involve introducing primary legislation with resulting timeframes associated with this.

Final thoughts

The desire to improve supply chain resilience and protect SMEs and entrepreneurs by addressing imbalances in negotiating positions and improving access to financing is certainly desirable. However in doing so regulators should be careful not to create new difficulties for financial market participants further along the chain by restricting traditional freedom of contract rights.  The Amended Text language recognises the need to preserve freedom of contract, however the current proposals, even with changes made in the Amended Text, could be considered to be a fetter on existing market freedoms which are not conducive to an open, free and cohesive market. 

A number of responses to the consultation on the proposals indicate that market participants do not embrace the Proposed Regulation.  The EESC also expressed concerns that the Proposed Regulation “might limit the flexibility of Member States and of the business environment at a time of multiple headwinds across the EU, and calls for further assessment of the proposed measures as well as a proportional and customised approach to implementation”.

The Proposed Regulation risks creating additional payment pressures for those unable to meet the 30 (or even, as proposed in the Amended Text, 60) day payment requirement and disrupting a well-functioning supply chain market.  We hope that the legislation, when final, will permit more flexibility in relation to the payment period and instead of dealing with late payments with strict regulations, consider other mechanisms to ensure parties act in good faith in contractual dealings, such as the Prompt Payment Code in the UK. 

The Amended Text has taken on board some consultation responses and it is encouraging for the market that the Amended Text addresses removing restrictions on assignment, that prevail in some jurisdictions, and promotes awareness of factoring and similar financing services10.  However, as we have highlighted above, there are a number of ambiguities in the drafting of the Proposed Regulation which need addressing and, in our opinion, the Proposed Regulation requires a much deeper impact assessment.  We encourage consideration of the impact on the wider financial markets which are also essential to providing funding for and the functioning of the wider economy and allow more flexibility for transaction parties to negotiate contractual terms freely on a fair and reasonable basis with reliance on already existing legal remedies.

If you have any questions on this topic please speak to your usual Structured Finance contact at Hogan Lovells.

This note is for guidance only and should not be relied on as legal advice in relation to a particular transaction or situation.  Please contact your normal contact at Hogan Lovells if you require assistance or advice in connection with any of the above.


Authored by Dietmar Helms, Julian Craughan, Claire Ellis, and Jane Griffiths.

1 The European Parliament adopted amended text at the Plenary session on 23rd April 2024: see press release.
2 The Final Compromise Amendment proposes clarifying the application of the Proposed Regulation to micro-enterprises.
3 See the European Commission press release: Championing Europe's SMEs: Commission provides new relief to boost the competitiveness and resilience of SMEs.
4 The Proposed Regulation will not affect shorter terms laid down in legislation.  There are derogations for a reduction of 60 days, in the Directive on unfair trading practices in the agri-food sector for non-perishable products, to 30 days, and for certain healthcare and public authority activities.
5 Article 7 of the Proposed Regulation contemplates that instalment payments may be on the basis of schedules.
6 Micro-enterprises are referred to in the Final Compromise Amendment, though micro-undertaking is also used, the term “micro-undertaking” as being referred to Article 3(1) of Directive 2013/34/EU.
7 The European Parliament proposes that payments made in performance of obligations stemming from insurance contracts should be covered by the Proposed Regulation. In particular, payments made in transactions between insurance companies and undertakings in exchange for the delivery of goods or the provision of services for remuneration, including as a compensation to other third parties, should fall within the scope of this Regulation.
8 A number of amendments have been proposed by European Parliament members with compromise amendments set out in the European Parliament Final Compromise Amendments (Final Compromise Amendment).  In its Opinion on the Revision of the late payments directive of 30 January 2024, the EESC, whilst in favour of some improvements, expressed concern about some provisions of the Proposed Regulation.  The European Parliament’s Initial Appraisal of a European Commission Impact Assessment also highlights some of the market concerns about the Proposed Regulation. Concerns are further addressed in European Parliament background note published before the European Parliament policy debate of 7 March 2024.
9 See the UK Small Business Commissioner’s Prompt Payment Code: Code Criteria.
10 The European Commission, in its Study on Supply Chain Finance Final Report dated January 2020, highlighted the relevance and usefulness of supply chain financing, including the need to promote knowledge about this as a finance tool.


This website is operated by Hogan Lovells International LLP, whose registered office is at Atlantic House, Holborn Viaduct, London, EC1A 2FG. For further details of Hogan Lovells International LLP and the international legal practice that comprises Hogan Lovells International LLP, Hogan Lovells US LLP and their affiliated businesses ("Hogan Lovells"), please see our Legal Notices page. © 2024 Hogan Lovells.

Attorney advertising. Prior results do not guarantee a similar outcome.