Payment congestion – what is it?
The concept of payment congestion is best explained as an accumulation of debts affecting a company’s liquidity and relationships with its counterparties. Payment congestion occurs when your company waits too long to receive payments from business partners. If the matter drags on, non-payment can disastrously affect the finances, and therefore the credibility of the company.
What are the causes of payment congestion?
The causes of payment congestion can be many. One of them is the companies’ ill-considered financial strategy – some companies make the ability to pay their counterparties dependent on whether they themselves receive payment from another business partner. There are situations in which even small delays result in liquidity problems for the company.
Another common reason is the country’s economic situation. Most companies strive to create an adequate financial base for unforeseen circumstances. However, there are situations that surprise everyone by the scale or speed with which difficulties pile up. In times of economic crisis, many companies may lose steady sources of income, and by extension liquidity, sometimes even despite wise management and having sufficient reserves for quiet times.
Another reason for the occurrence of payment bottlenecks is the dishonesty of counterparties. Some companies, taking advantage of the low efficiency of the courts or slow debt collection, deliberately delay the moment of repayment as long as possible.
Indirect causes of business congestion can also be reckless business decision-making – doing business with unproven companies, or deals made in so-called “business as usual. “gray zone.”
What is the threat of payment congestion?
Each enterprise is part of a network of enterprises that establish business relationships with each other. The occurrence of a long-term payment bottleneck can be baleful for a company that not only sells its goods and services, but also invests (for example, in new technologies).
Payment congestion can result:
- company solvency problems;
- loss of liquidity;
- deterioration of relations with business partners;
- the inability to pay workers’ wages;
- stopping the development of the enterprise.
How to deal with payment congestion?
Although the occurrence of a payment jam is always a difficult situation for a company, it is not without a way out. Over the years, a number of solutions have emerged that enable companies to recover from the crisis and minimize the negative effects of payment congestion. Both the state (the law on payment congestion) and the financial services market(loans and factoring) have made their proposals for companies.
Law on payment congestion
January 1, 2020. a law passed by the parliament to reduce the occurrence of payment bottlenecks came into force. Since the issue can affect any industry, but is particularly common in transportation, construction and the food industry (which are particularly important for the stability of the economy), practical solutions had to be presented. What does the law assume?
- The provisions of the law regulate the issue of maximum payment terms. The 30-day payment period applies to transactions in which the debtor is a public entity. Exceptions are medical entities (for example, hospitals). For them, the maximum payment term is 60 days. Such a term also applies to business-to-business transactions, in which the debtor of an SME company will be a large enterprise.
- Withdrawal under special conditions – under the law on payment congestion, companies can withdraw from or terminate a contract if the payment term exceeds 120 days.
- Obligation to prepare a report on payment practices for large companies. This solution is expected to make it easier for smaller companies to check the payment terms used by potential business partners without using the services of business information bureaus.
- Larger interest for late payments – as of January 2020, creditors are entitled to interest for late payment at 11.5% (previously the interest rate was 9.5% – now the lower rate will apply only to medical entities).
- The law also provides for the introduction of administrative penalties for those entrepreneurs who create payment bottlenecks. The authority responsible for imposing the above. The penalty is the OCCP.
In addition to the aforementioned solutions, the government has decided to make changes to the personal and corporate income tax laws. In short: if the debtor fails to pay within 90 days of the due date, the creditor will be able to reduce the tax base by the missing amount. Similarly, the debtor in such a situation will be forced to increase his income by the unpaid amounts.
Factoring as a way out of payment bottlenecks
Despite a number of changes introduced by the parliament, entrepreneurs are still eager to use factoring. With this service, recovery is somewhat easier, and certainly faster than using government solutions.
Factoring is another way of buying back receivables. The company using the service receives the money expressly (even in a few hours), and can also transfer the risk of counterparty insolvency to the factor. In such an arrangement, the factoring company will handle the collection of the receivables itself. For more information about the types of factoring, see our guide in the article – What is factoring and what are its types.
It is worth mentioning that factoring can be used as a tool for permanent financing of invoices – in case payment terms are still too long for the company or the chain of suppliers is long and the wait for repayment drags on. Many factoring companies also offer buyouts of individual invoices, which opens up new opportunities for factoring companies. A one-time use of factoring allows you to cope with temporary problems, as well as send a signal to procrastinating contractors.
