Sunday, March 25, 2012

The effects of not paying your bills on time

One of the most difficult aspects of starting a business in Spain is getting paid on time. Late bill payment is endemic, and enforcement via the courts takes long enough to make it almost not worthwhile. This is especially true of any kind of government work, where payments can take years to materialize. To add insult to injury until recently, you even had to pay VAT on payments that you hadn’t yet received.

It would be interesting to analyze how these late-payments affect the economy, since there is are large secondary effects, since a company can obviously not pay the bills of its suppliers until it has been paid itself.

What could Spain do to fix this problem?

For one, we could have a functioning court system that is fast enough to enforce payments on contracts within a timeframe that allows a business to function (you could be in court for 2-4 years). Although contracts are generally based on trust, it only works if both parties know that the hammer of the law will come down quickly on the party that breaks the contract.

Something that I haven’t seen here, but works pretty well in the US is the idea of a preliminary injunction. The concept is that a judge can quickly grant an injunction (such as freezing money in a bank account) based on the likelihood of the outcome and the potential damages to each of the parties. In order to keep corruption at bay, you obviously need a fast appeal process that can overturn biased decisions.

In the end, by having faster and more effective court enforcement, there might actually be less strain put on court resources, since most people would avoid wasting the effort of going to court if the outcome is fast and predictable.

The second part would be to legally allow companies to charge interest on overdue accounts at relatively high rate. For example, in the US in many states you can automatically charge 1.5% per month on bills more than 90 days overdue. In Spain, people seem to think that unpaid bills are some kind of free loan, and the longer you can avoid paying it, the better.

1 comment:

Moof said...

There is the "Interés Legal de Demora" which appears to be 8%, though I can't tell the time scale, I assume it's annual. It's revised every six months -

You can also reclaim VAT on unpaid bills, but that takes 6 months or so, and you need to demonstrate that it is unpaid.

Again, it's a cultural thing, the legal facility exists, but nobody wants to be the first to apply it, as you'll lose customers, so only the courts and insolvency administrators apply it.

In the UK, bills up to £5000 can be settled rapidly at a magistrate's court, which has a rapid hearing, low fees (£5, I think) and no need for legal representation. Something like that in Spain would do wonders to turn the market around, though of course, it would end up with the typical moaning about "one law for the poor and another for the rich" as large companies with bills over the threshold would still end up years in court...