Paying bills on time can be a challenge for households, but it’s a discipline that can escape even the biggest corporations, often to the detriment of smaller companies. Small businesses that are unable to collect on payments can stagnate, or worse, go bankrupt during the already lean climate of the recession.

The practice can lead to a self-perpetuating downward spiral, as businesses that can’t collect on debts are unable to pay their own creditors. The problem has exacerbated a liquidity crisis touched off by a lending freeze from the banking sector.

"I believe larger companies tend to abuse smaller companies, and, by default, we end up abusing companies smaller than us," said Stuart Howitt, principal of the Czech office of the architectural firm Douglas Wallace Howitt. "Unfortunately, we’re in the middle of this whole chain."

In a survey of 1,167 companies by the Czech Chamber of Commerce, 75.2 percent responded that the recession had manifested itself by late payments from debtors. As a result of the resulting stalled cash flow, 47 percent have had to delay payments or request postponements.

The Czech Republic has addressed the issue with a proposed tax law amendment that would require businesses to pay VAT only after they have received payment for goods or services. Currently, companies must pay VAT after an invoice is issued, regardless of whether the bill is paid. On the other side of the transaction, the amendment would also only allow payments to be tax deductible costs after the money has been sent, not simply when the invoice has been received.

The dilemma is nothing new, but evaporating liquidity has pushed the problem to outrageous levels that could bring about an internal financial crisis in the Czech Republic, said Jo Weaver, chairwoman of the International Business Forum and, as managing director of JWA Prague, an SME owner herself. The biggest culprits are also the largest firms, which cause damage by setting dangerous precedents for other companies to follow, she said.

"Some of the bigger companies are openly asking suppliers to wait three or four months for payment," she said. "The knock-on effects of this are huge. I know a lot of companies that are on the verge of collapse, purely because just one big company - that itself is in trouble - has not paid them."

The worsening situation with late payments has prompted the European Commission (EC) to update its late payment directive, which was originally issued in 2000. The commitment to do so was made under the Small Business Act, adopted in 2008, and the EC finally adopted specifics of the proposal April 8. The changes will require public authorities to pay within 30 days or else pay interest at a flat rate of 5 percent, allow creditors to charge recovery costs in case of late payment, tighten rules on unfair contracts that exclude late fees and cancel the prohibition on collecting interest on claims worth less than 5 euros. The new rules, which are expected to go into effect in 2010, are optional for businesses in that they can use them as protection, but are not obliged to do so in the interest of preserving business relationships. Keeping clients happy is often a reason business owners are hesitant to take extreme measures, Howitt said.

"We phone them every week, try to be nice when we’re chasing them, but we’ve never had to revert to more radical forms such as debt collecting agencies," he said, but added that, because of the worsening economic situation, his firm has recently been in contact with one such agency to address one of their more problematic debts. "We’re very, very seriously considering it."

Under current Czech law, companies can charge interest on payments that are more than 30 days late. Late payments are defined either by contractual agreements between companies, or in the absence of that, the state legal provision that allows 30 days for payment.

"Fourteen days is the standard time in contracts," said Jiří Hrádek, a senior associate at Schoenherr law firm in Prague. "Since late payments are partly governed by commercial code, and partly by contracts, it depends really on the willingness of parties to fulfill obligations."

The Industry and Trade Ministry is the government arm that oversees the issue, said spokesman Tomáš Bartovský, and works in conjunction with the Czech Association of Small and Midsize Enterprises and the Czech Chamber of Commerce. While companies can charge interest, enforcing it is another problem, as Bartovský said the main option was to simply file a suit, a costly venture in itself.

"I have a court case that has been postponed for 18 months in order to ensure the defendant never goes to trial," said Weaver. "You have to pay a lawyer and court fees, and you might not even be able to go to court. So, even if it worked, it might cost more than the amount you haven’t been paid."

Companies that aren’t forced into insolvency by the "knock-on" effect of late payments and dwindling cash flow can still be severely hobbled and live payment-to-payment, unable to make any long-term plans.

"It’s difficult to judge how you can grow the business if the money’s not there," Howitt said.

For further information:

The Prague Post