Late payment is a widespread practice in much of the modern world, and the EU is no exception. A major drain on the European economy, it is the cause of 1 in 4 bankruptcies, wiping out an estimated 450 000 jobs every year. Small businesses are most vulnerable because they depend on timely receipts to maintain cash flows, especially now banks are reluctant to issue loans.

Perhaps no one is more familiar with the problem than public contractors, because when it comes to not paying bills on time, governments are some of the worst offenders.

Responding to growing complaints, the commission has drafted legislation introducing tougher penalties against late payments.

Under the proposed directive, authorities – and publicly funded bodies – would face a 5% fine for bills that aren’t paid within 30 days. They would also have to pay interest on the amount due and compensate businesses for costs incurred trying to collect late payments.

Except for the late payment fine, the same rules would apply to private clients that pay late.

Quick adoption of the legislation could give companies some relief from the recession and boost integration among EU economies. Long overdue payments make companies wary of doing business in other countries, hampering growth and competitiveness.

According to a recent business survey, public authorities in Europe took an average of 65 days to pay their bills in 2008, about 10 days more than the private sector. But national averages vary widely, with some countries taking more than three months.

For its part, the commission said it would speed up initial payments on EU grants and contracts. It will also accelerate procurement procedures, for example by standardising calls for tender and publishing the calls earlier.

The European ombudsman has asked the commission for a report on its efforts to tackle late payment problems. More than 20% of payments made in 2007 involved delays.