Economic Impact of Late Payments

Delays in payments in Business to Business (B2B) and Government to Business (G2B) transactions generally have an adverse effect on the cash-flow of firm and can cause firms, particularly small ones, to seek extensions of their overdraft facilities and increase their borrowing. Late payment of commercial debt can play a significant role in the survival of firms as their liquidity can be severely affected, even forcing some firms to exit the market. This has been particularly important during the economic and financial crisis as access to credit has been more restricted. This note addresses the economic effect of late payments by approximating the possible financial cost for firms and by estimating the empirical link between late payments and the exit rate of firms. Both payment delays in G2B and B2B transactions are considered. The note focuses on four EU countries where late payments are a serious problem (Italy, Spain, Portugal and Greece), but the econometric analysis linking late payments with exit rates uses a broader set of Member States and thus the results can be easily extended to other countries. This work was carried out in the context of an ECFIN project which main findings are presented in the report: European Commission (2014) "Market reforms at work in Italy, Spain, Portugal and Greece", European Economy 5|2014