Toughening Up on Late‑Payment Laws: A Global Shift in SME Protection
From Treasury Mastermind Governments around the world are increasingly stepping in to curb long‑standing corporate practices of stretching payment terms—often at the expense of small and medium‑sized suppliers. A recent UK announcement outlines plans for “the toughest late‑payment laws in the G7,” setting maximum B2B payment terms at 60 days (with a phased move to 45), mandating interest on overdue invoices, and giving regulators the power to issue multimillion-pound fines. Audit committees will also be legally required to oversee supplier payment practices at board level. This follows earlier European Commission proposals to revise the Late Payment Directive, with ideas such as a 30‑day payment cap under consideration. While initial pushback led to further consultation, the direction is clear: long payment terms are under scrutiny, and legislative momentum is building. Why This Matters for SMEs & Corporates Bridging the Power Imbalance Large corporations often negotiate payment terms of 90–120 days or more, leveraging their bargaining power. SMEs, lacking that leverage, are left to absorb the strain. These reforms aim to level the playing field, helping small suppliers maintain liquidity and avoid the knock-on effects of delayed payments. Working Capital Fallout For corporates, long payment terms have historically served as a cheap form of working capital. But as regulation shortens these windows, buyers will see earlier cash outflows, putting pressure on internal cash management. On the supplier side, SMEs lose the flexibility of absorbing long waits for payment and may face cash flow issues that limit their ability to grow, invest, or even survive. Working Capital Solutions: Factoring, Reverse Factoring & More To deal with the stricter rules, both buyers and suppliers are likely to turn to alternative financing models: Factoring SMEs sell their invoices to a third party to receive immediate cash, reducing the cash flow burden of waiting for payment. While helpful, it can be expensive and is dependent on supplier creditworthiness. Reverse Factoring (Supply Chain Finance) Buyers use their own stronger credit rating to help their suppliers get paid earlier via a financing partner, while still maintaining longer payment terms from their own books. This can preserve working capital for both parties if structured correctly. Dynamic Discounting Suppliers offer discounts for early payment, and buyers can take advantage of savings while improving supplier relationships. Other traditional options such as overdrafts, credit lines, and invoice discounting also remain on the table, but the focus is shifting toward more digital and embedded finance options. Fairer, but Not Without Trade‑Off While it’s clearly fairer for SMEs, this regulatory shift introduces new challenges for corporates: Still, the broader benefit is a healthier and more predictable supply chain, with less disruption caused by late payments and bankruptcies. What Should Treasurers Do? In Summary Governments are putting late payments under the microscope—and rightly so. The goal is to create a more equitable environment for SMEs and reduce systemic financial risk. But for corporate treasurers, this means a shift in how working capital is managed. Stricter rules may cut into traditional levers like stretching payables, but the right combination of internal forecasting, financing tools, and supplier collaboration can soften the blow—and may even lead to more resilient supply chains. If you’re concerned about how upcoming rules could affect your cash position or payment policies, now is the time to act. Better to get ahead of regulation than scramble to catch up later. Also Read Join our Treasury Community Treasury Mastermind is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Franklin
Is Your Hedging Policy Sophisticated Enough for Today’s Markets?
This article is from our content partner, CorpHedge This year has been exceptionally marked by the weakness of the U.S. dollar. In the first half of this year, the trade-weighted U.S. dollar declined by more than 8%, marking the greenback’s worst mid-year performance in over 40 years. For me, this is a stark reminder that currencies can experience incredibly sharp trends. As long as we see range-bound markets, it’s easy to feel secure in a static hedging policy. But when a significant move occurs, it forces us to ask the tough questions: Is our policy good enough? Where can we improve? In my experience, CFOs and treasury professionals often fall into two camps: those who strictly adhere to a pre-defined policy regardless of market conditions, and those who take a more opportunistic, yet still risk-averse, approach. I’d like to analyze how we can build a better, more dynamic hedging policy. The starting point for any company must be a clear-eyed assessment of its own risk appetite. From there, we need to consider both internal and external factors. The internal, subjective factors include the company’s risk tolerance and the time pressure of its forecasted flows. For instance, a near-term payment for an acquisition carries immense time pressure, whereas a more speculative, long-term forecast has less urgency. Next, we must analyze the external market factors. When executing derivative transactions, we are dealing with financial markets shaped by a multitude of signals. For those of us aiming to hedge effectively, I believe a few are particularly critical to watch: 1. Valuation: What is the currency’s current value compared to its Purchasing Power Parity (PPP) level? While currencies are expected to revert to their PPP fair value over time, this correction can be very slow. A more useful concept for treasurers is the ‘half-life’ of the deviation. According to research by Craig (2005), this is the time it takes for half of the over- or undervaluation to disappear. His findings show that for major currencies far from their fair value, this process often takes about 12 to 18 months, giving us a more practical timeframe than just “the long run.” 2. Volatility: As risk managers, volatility is crucial. We should ask not only how current implied or realized volatility compares to historical levels, but also: What is the current volatility percentile? Is it unusually high or low? This context is key. 3. Interest Rate Differentials (Carry): This factor directly determines hedging costs, but its analysis requires nuance. From a classic Wall Street perspective, the carry trade involves borrowing in low-yielding currencies (like the JPY or, until recently, the USD) to buy higher-yielding ones (like the AUD or NZD). However, the recent environment has been unusual. The U.S. dollar, typically a funding currency, has acted more like a high-yielding one compared to the euro or yen. This created a powerful incentive for companies to leave their USD-denominated inflows unhedged, hoping to profit from the high yields and the belief that the dollar would only get stronger. But this strategy has a well-known vulnerability. During major risk-off events, like the 2008 financial crisis, these carry trades can unwind violently, leading to massive losses. This is why, as a risk manager, I argue against looking at interest rate differentials in isolation. A much more powerful metric is the risk-adjusted carry. This means we don’t just look at the yield pickup; we adjust it for the currency’s volatility. This leads us to the carry-to-risk ratio, often calculated by dividing the interest rate differential by 30-day volatility. A higher ratio suggests a more favorable risk-reward profile, while a lower ratio signals potential danger in a risk-off scenario. In my view, this is a far superior tool for cross-currency analysis. The Recent USD Story: A Perfect Storm At the beginning of this year, the USD was overvalued by about 32% according to PPP data. The context was a U.S. administration keen on reducing the trade deficit, implying a desire for a cheaper dollar. With this uncertainty, it was no surprise that volatility rose significantly. The currency was overvalued, and volatility was rising sharply—a classic recipe for a major downward move. PPP data at the beginning of the year (OECD): A recent paper from the Bank for International Settlements (BIS) confirmed what happened next: the dollar’s decline was accelerated by a rush to hedge. For a long time, the consensus view of USD strength, combined with low volatility and high hedging costs, meant many flows went unhedged. The BIS noted that Japanese life insurance companies, for example, had only hedged about 40% of their flows from 2021-2024. When they and others rushed to increase hedges in April, it triggered aggressive dollar sell-offs, creating a chain reaction that fueled the aggressive downward trend we witnessed. How to Build a Better Hedging Policy I believe that in this day and age, with data so accessible and technology so advanced, applying the same static hedging principles from 20 years ago is a mistake. We can and should be more sophisticated. This sophisticated approach involves building a framework that assigns weights to the key factors: fair value (PPP), volatility, and risk-adjusted carry. This model should also incorporate your company’s internal factors, like risk aversion and the time pressure of its cash flows. All of this can be consolidated into a scoring system. The output is a dynamic optimal hedge ratio that moves based on changing conditions. Instead of being fixed, your hedge percentage might increase or decrease from the static baseline required by your layering policy. This approach makes your policy more intelligent and precisely aligned with both market conditions and your company’s risk profile. Under such a system, high-quality, up-to-date data becomes paramount. By adopting such a dynamic method, a company can significantly enhance its hedging policy, allowing it to stay closer to the market while ensuring it remains protected from adverse financial impacts. Join our Treasury Community Treasury Mastermind is a community of professionals working in treasury management or those interested in…