Assessing the economic impact of faster payments in B2B commercial transactions

Delayed payment in commercial transactions, is an important concern for businesses. Excessively delayed payments determine higher cost and liquidity risks for the supplier and are a main cause for insolvency and bankruptcy. Such concerns have led the European Commission to adopt the Late Payment Directive (LPD) in 2011, this is the recast of an earlier late payment directive, adopted in 2000. The LPD’s objective is set to tackle late payments in business-to-business (B2B) and public administration-to-business (PA2B) transactions and foster a “culture of prompt payment” in the EU. The present study sets an empirical framework to estimate the economic impact of capping the payment term in B2B commercial transactions to 30 and 60 days, considering a panel of nine European countries. It implements the statistical technique known as difference-in-differences (DiD) to estimate the impact of the LPD-B2B, on firms’ performance. Results indicate that the LPD has been associated with higher cash flow in firms that were experiencing longer time to collect their credits in the past. In particular, four years after the adoption of the LPD the average cash flow is twice as much its value the year before the introduction of the directive, when comparing firms highly exposed to payment delays with less exposed ones. Moreover, this study documents that a significant positive difference between more and less exposed firms is also found in the levels of sales, again four years after the introduction of the directive.