LME Act and payment terms: what are your company's obligations?
The entry into force of the LME law, or law on the modernization of the economy, was a response to the need to revitalize the economy.
One of its key measures was to cap invoice payment terms. These were too long, and tended to slow down the economy by impacting VSEs and SMEs, which were sometimes obliged to borrow in order to continue their activities.
What are the advantages of the LME law? What are the payment deadlines and how do you calculate them? We tell you all about your obligations, and the software you need to meet them!
What is the LME Act?
LME Act: definition
The LME law, or loi de modernisation de l'économie, came into force in August 2008. It defines a set of measures designed to boost the economy, which can be divided into 4 categories.
Entrepreneurship support
The aim of this scheme is to encourage business start-ups, in particular through :
- the creation of the auto-entrepreneur status,
- protecting the assets of individual entrepreneurs,
- simplifying the law for small and medium-sized businesses,
- promoting business takeovers and transfers.
☝️ The other major measure included in this section is the capping of payment periods, to which we will return in greater detail.
Mobilizing competition
Mobilizing competition involves
- the creation of the Competition Authority,
- the modification of sales periods (now 5 weeks in winter, 5 weeks in summer and 2 floating weeks during the year),
- the abolition of the authorization procedure for the installation of a retail outlet with a surface area of less than 1,000 m².
Enhancing the attractiveness of the region
A number of measures have been adopted to enhance the attractiveness of the region:
- the democratization of high-speed broadband,
- an advantageous tax system to encourage foreign executives to settle in France,
- simplified issuance of residence permits by prefects.
Financing the economy
Finally, to promote financing of the economy, the LME Act provides for :
- extending the Livret A passbook savings account, with the aim of unlocking household savings,
- strengthening the role of the Caisse des dépôts et des consignations,
- modernizing the financial sector to boost growth and employment.
The benefits of the law on the modernization of the economy
The LME law aims to stimulate growth. It is based on the observation that companies rarely receive payment within a reasonable timeframe.
The loss of earnings associated with these uncollected debts penalizes their cash flow. As a result, businesses find it difficult to pay their bills, and are unable to make purchases.
The aim of the law to modernize the economy therefore lies partly in reducing these inter-company credits, to inject more liquidity into the economic circuit.
💡 Since the law came into force, there has been an improvement in payment times. At least, that's what this infographic compiling the results of the Observatoire des délais de paiement 2018 annual report, produced by Gestion Crédit Expert, reveals:
What are the payment terms under the LME Act?
Changes in the legislative framework for payment terms
Originally, the LME Act capped payment terms at :
- 45 days end of month, or 60 days net from date of invoice, if contractually agreed;
- 30 days if payment terms are not specified in the contract, as introduced in 2001 by the NRE law on payment terms.
The Hamon law, which came into force in 2014, then introduced a single 45-day deadline on the date of issue of invoices summarizing several deliveries of goods or services for the same customer during the month.
Finally, in 2015, the Macron law restored the 60-day net invoice-date ceiling. This became the single ceiling still in force today. There is still the possibility of setting it at 45 days, with the agreement of both parties in the contract.
Payment terms for the public sector
For the public sector, the maximum payment terms defined since May 1, 2013 are as follows:
- 30 days for all State contracts and public establishments excluding EPICs (public industrial and commercial establishments),
- 50 days for public health establishments and the armed forces health service,
- 60 days for contracting authorities, as stipulated in article 3 of the Order of June 6, 2005.
Sector-specific payment terms
Due to the nature of the products they market, certain sectors are subject to specific payment terms. For example
- 30 days after the end of the ten-day delivery period for purchases of perishable food products and frozen or deep-frozen meats, frozen fish, ready-made meals and preserves made from perishable food products,
- 20 days after the day of delivery for purchases of live cattle for consumption and fresh meat products,
- 30 days after the end of the month of delivery for purchases of alcoholic beverages subject to consumption duties under article 403 of the General Tax Code,
- 45 days after the end of the month, or 60 days after the invoice date, for purchases of grapes and musts intended for the elaboration de vins ainsi que de boissons alcooliques passibles des droits de circulation prévus à l'article 438 du code général des impôts.
💡 Find all these specific provisions in article L441-11 of the French Commercial Code.
Special payment terms
A number of business sectors (particularly those with a high seasonal impact) benefit from special payment terms under inter-professional agreements. These include
- agricultural equipment,
- sporting goods
- the leather industry
- watchmaking, jewelry, goldsmiths and silversmiths,
- and the toy trade.
If you are concerned, find out more about the various derogation agreements on the website of the French Ministry of the Economy, Finance and Economic Recovery.
Payment terms for exports
The LME law does not apply to commercial contracts signed outside France. Consequently, a French company can invoice a foreign company without taking into account the payment terms in force in France. These can be 90, 120, 150 or even 180 days. However, for commercial transactions between companies located in the European Union, the ceiling is 60 days.
In addition, there is a peculiarity concerning the French overseas departments and territories, due to the longer duration of goods transportation. In this context, the statutory time limits set out in the LME Act apply only 30 days after receipt of the invoice.
Penalties for non-compliance
Bad payers are liable to fines levied by the Direction Générale de la Concurrence, de la Consommation et de la Répression des Fraudes - DGCCRF.
The maximum fine is
- 75,000 € for an individual,
- 375,000 € for a legal entity.
In the event of a repeat offence over the following two years, these amounts can be doubled.
In 2016, the Sapin law raised the ceiling to €2 million for legal entities.
Before reaching these levels, late payment indemnities are calculated according to a formula based on the European Central Bank (ECB) interest rate. The parties (customer and supplier) may decide on a different rate, provided it remains greater than or equal to three times the legal interest rate.
LME Act: calculating payment terms
How do you calculate a 45-day month-end due date?
This deadline means adding 45 days to the invoice issue date, then going to the end of the month of this 45th day.
👉 Examples:
05/06/2020 ‣ payment must be made before 07/31/2020
06/15/2020 ‣ payment must be made before 07/31/2020
18/06/2020 ‣ payment must be made before 31/08/2020
How to calculate 30 days end of month?
This deadline means that payment, set by the LME law, must be made by the end of the month following invoice issue at the latest.
👉 Examples:
05/06/2020 ‣ payment must be made before 31/07/2020
18/06/2020 ‣ payment must be made before 31/07/2020
30/06/2020 ‣ payment must be made before 31/07/2020
How to calculate 60 calendar days?
This deadline means that the invoice must be paid no later than 60 calendar days from the date of issue.
👉 Example:
15/06/2020 ‣ payment must be made before 13/08/2020
30/06/2020 ‣ payment must be made before 28/08/2020
Accounting software to help you meet deadlines
The challenge is to pay your suppliers on time. With the "month-end" invoicing system, it used to be possible to process everything at the same time.
Now, with calendar billing, it's the invoice issue date that you need to pay attention to. The risk is to let invoices flow in as they come in. If you only pay attention from time to time, you may miss a few deadlines.
That's where having accounting software that's up to date with the latest legislation is invaluable. So it makes sense to choose a SaaS (Software as a Service) solution in this area. Sage 100c Comptabilité, for example, has the advantage of sending you reminders in the event of late payment. With Factomos, you can view your most recent invoices for better control.
The legal obligations with which companies must comply are evolving in the direction of greater liquidity. On the other hand, for companies, this implies greater reactivity and assiduity in invoice follow-up, which only accounting software can provide.
Article translated from French