Payment Delay

What is payment delay?

Payment delay (default of the debtor on monetary claims, Zahlungsverzug) describes the situation in which a debtor does not pay a due monetary claim on time, even though a demand for payment has been made or a demand is not required. The debtor is the party that has to pay, and the creditor is the party that can demand payment. In addition, the debtor must be responsible for the delay. For monetary debts, this is almost always the case, because a lack of money does not exonerate the debtor. Default is regulated mainly in Sections 286 and 288 of the German Civil Code (Bürgerliches Gesetzbuch, BGB).

For companies, the creditor side usually matters most: how late-paying customers are handled determines how quickly revenue becomes available cash. In funding rounds and company acquisitions, investors and buyers therefore examine overdue customer receivables. They affect liquidity planning, working capital (the capital tied up in the ongoing business) and the quality of revenue. Conversely, a company's own overdue invoices to suppliers are regarded as a warning sign of liquidity bottlenecks.

Conditions for default

The claim must be due and enforceable. It is due as soon as the creditor can demand payment; it is enforceable if no defence, such as limitation, stands against it. As a general rule, default arises only through a demand for payment (Mahnung) after the due date (Section 286(1) BGB); a single clear request for payment is sufficient, and no particular form is prescribed. The demand for payment is not required, among other cases,

• if a date determined by the calendar is agreed for payment, for example "payable by 31 March",
• if the agreed date can be calculated by the calendar from an event, for example "30 days after delivery",
• if the debtor seriously and definitively refuses to pay.

A date that the creditor sets unilaterally only in the invoice is not sufficient for this according to the prevailing view. Independently of this, a 30-day rule applies to claims for remuneration (Entgeltforderungen), that is, claims for payment for a delivery or service. Under Section 286(3) BGB, the debtor falls into default at the latest if it does not pay within 30 days of the due date and receipt of an invoice. Towards consumers, that is, private individuals, this applies only if the invoice specifically points out this consequence. No default occurs as long as payment is not made because of a circumstance for which the debtor is not responsible (Section 286(4) BGB). An example is an incorrect bank account in the invoice.

Legal consequences

• Default interest: monetary debts bear interest during default at five percentage points above the base rate (Section 288(1) BGB). In legal transactions without consumer involvement, the interest rate for claims for remuneration is nine percentage points above the base rate (Section 288(2) BGB). The base rate is a statutory reference rate that changes on 1 January and 1 July of each year (Section 247 BGB); the German Federal Bank (Deutsche Bundesbank) publishes the value currently applicable.
• Lump sum: if the debtor is not a consumer, the creditor of a claim for remuneration can additionally demand EUR 40 (Section 288(5) BGB), including for instalment and part payments. It is offset against damages to the extent that these consist of costs of legal enforcement.
• Damage caused by default: costs arising from the default are recoverable, for example for a law firm or a debt collection company after default has occurred. The costs of the first demand for payment, which only triggers the default, are not included.

Default interest and the lump sum are damages and are therefore not subject to VAT. In business transactions, an exclusion of default interest agreed in advance is invalid; an exclusion of the lump sum is, in case of doubt, regarded as grossly unfair and is then likewise invalid (Section 288(6) BGB).

Dunning and receivables management

Receivables management begins before the invoice. Contracts with payment dates determined by the calendar make the demand for payment unnecessary, and advance payments and direct debit mandates reduce the risk on larger orders. Payment terms of more than 60 days between companies are effective only if they are expressly agreed and not grossly unfair to the creditor (Section 271a(1) BGB). After the due date, a fixed rhythm follows: a payment reminder a few days after the due date, then a demand for payment with a reference to interest and the lump sum, accompanied by a phone call. Accounts receivable accounting supplies the list of open items for this.

For undisputed claims, the court dunning procedure (gerichtliches Mahnverfahren) leads relatively cheaply to an enforceable title, that is, a basis on which the claim can be collected by compulsion. Service of the payment order (Mahnbescheid) also suspends the limitation period (Section 204(1) no. 3 BGB): the period does not continue to run during the procedure. This matters because the regular limitation period of three years begins at the end of the year in which the claim arose and the creditor became aware of it; a simple demand for payment does not suspend it.

Impact on liquidity, balance sheet and valuation

In liquidity planning and in the ongoing forecast, the actual receipt of payment counts, not the due date. Robust plans use observed payment behaviour, for example the average collection period (days sales outstanding, DSO) per customer group, that is, the number of days between invoice and payment. It is one building block of the cash conversion cycle. If this period lengthens, the company ties up more capital in current assets.

In the annual financial statements, receivables are measured according to the prudence principle. Doubtful receivables are written down individually to the amount still expected to be recoverable (individual valuation allowance, Einzelwertberichtigung). For the general default risk, a flat-rate deduction on the remaining portfolio is widespread (general valuation allowance, Pauschalwertberichtigung). If a receivable becomes uncollectible, VAT must be corrected under Section 17(2) no. 1 of the German VAT Act (Umsatzsteuergesetz, UStG): the company's VAT liability falls by the tax contained in the receivable. In due diligence, investors and buyers request an ageing structure of receivables, that is, a list of how long open invoices have already been overdue. Receivables overdue for more than 90 days are often written down in whole or in part in determining the purchase price and negotiated separately in the working capital adjustment.

Worked example

A software company invoices a business customer EUR 24,000 including VAT. The contract agrees 31 March as the payment date, so default begins without a demand for payment on 1 April. Payment is received after 90 days of default. A base rate of 2.0% is assumed; the value actually applicable can be obtained from the Deutsche Bundesbank. Interest is calculated to the day.

• Default interest rate: 2.0% base rate plus 9 percentage points = 11.0% per year
• Default interest: EUR 24,000 × 11.0% × 90 / 365 = EUR 650.96
• Lump sum under Section 288(5) BGB: EUR 40.00
• Claim in addition to the principal claim: EUR 650.96 plus EUR 40.00 = EUR 690.96
• Cost of bridging through an overdraft facility at an assumed 9.0%: EUR 24,000 × 9.0% × 90 / 365 = EUR 532.60

Arithmetically, the claim arising from the default exceeds the cost of bridging by EUR 158.36. This helps only if the company asserts interest and the lump sum and actually receives them. For planning, it weighs more heavily that EUR 24,000 of liquidity is missing for three months.

Distinctions from related terms

• Due date: the point in time from which the creditor can demand payment. It is a condition of default but does not justify it on its own.
• Deferral (Stundung): an agreement that postpones the due date; no default occurs in the meantime.
• Illiquidity (Zahlungsunfähigkeit): exists under Section 17 of the German Insolvency Code (Insolvenzordnung, InsO) if a debtor cannot meet its due payment obligations. Persistent payment delay by a customer can be an indication of it.

Common mistakes

• No agreed payment date. "Payable immediately" or a date stated only in the invoice postpone the onset of default until a demand for payment or until the 30 days have expired.
• Not sending demands out of consideration. Anyone who never sends a demand is often paid last when the customer's liquidity is tight.
• Demand for payment before the due date. A request for payment that is received before the due date does not trigger default and has to be repeated after the due date.
• Overlooking limitation. The three-year period always ends at the end of a calendar year.
• Planning with due dates. A liquidity plan that has every customer pay on time overestimates the funds available.

Frequently asked questions

Does a demand for payment have to be sent several times?

No. A single demand for payment after the due date is sufficient, and in many cases none is needed at all. Several dunning levels are commercial habit.

How high is default interest?

For claims for remuneration between companies, nine percentage points above the base rate; in the other cases, for example towards consumers, five percentage points. The surcharge is fixed by law; only the base rate changes, every six months.

Is the lump sum of EUR 40 due for small invoices as well?

Yes. It does not depend on the amount of the claim and can be demanded for every claim for remuneration on which a debtor who is not a consumer falls into default.

When is the court dunning procedure worthwhile?

For undisputed claims, often even for smaller amounts, because it is relatively cheap and suspends the limitation period. If the debtor lodges an objection, the matter can move into contested court proceedings.

The Roemer Capital view

In preparing a funding round or a sale, Roemer Capital analyses the open items list, that is, the list of all unpaid invoices, by age band. Roemer Capital reflects customers' actual payment behaviour in the financial model. Investors do not read a high share of receivables open for more than 90 days as chance but as an indication of the quality of sales, invoicing and management.

In the sale process, Roemer Capital ensures that overdue receivables are resolved before due diligence: collectible amounts are collected, doubtful ones are written down. The discussion about working capital then begins on an adjusted basis, and old receivables are not carried into the purchase price negotiation as a deduction.