The French government has set an ambitious objective – to reduce commercial credit payment delays to under 60 days. The new law, to be applied as of April 2008, will entail the transfer of billions of € from clients to the companies that supply them. The initiative is expected to be particularly favourable for SMEs and the government estimates that two-thirds of the transfers will be made from large corporations to their small corporate suppliers.
The effect on cashflow will vary according to the economic activity. On the one side, service companies whose clients are private individuals typically enjoy positive commercial credit as their individual clients pay upfront while they pay their corporate suppliers after only 60-90 days. At the other extreme, companies such as temporary employment agencies, should be net beneficiaries as they need to pay their staff immediately while their corporate clients usually only pay them after an average of 79 days. Payment delays range from sector to sector, including retail trade typically between 68 to 79 days but sectors like aeronautics, client payment delays average 136 days while suppliers are paid at 109 days.
The effects of changing payment delays are substantial and rapid. In the transport industry, for example, a law passed in 2005, pushed payment delays down to 30 days. Within a year, the number of companies that experienced +60 days for payment delays fell from 47% to 4%. Working capital requirements and especially short term credit needs, improved significantly for the sector’s SMEs. For large corporations, however, short term bank loans increased by 39.7% over the same period.
There is however legitimate resistance to shortening commercial credit times, notably from sectors like retail trade. Because of strict laws governing retail trade in France, commercial credit is used as a major negotiating tool between suppliers and the large retailers. As the ability to negotiate price is limited by French law (you cannot sell below price), commercial credit terms becomes one of the few factors to distinguish one supplier from another. This is unlikely to change despite the law.
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The French government has set an ambitious objective – to reduce commercial credit payment delays to under 60 days. The new law, to be applied as of April 2008, will entail the transfer of billions of € from clients to the companies that supply them. The initiative is expected to be particularly favourable for SMEs and the government estimates that two-thirds of the transfers will be made from large corporations to their small corporate suppliers.