SME industry welcomes late payment clamp down
President Jacob Zuma’s commitment to ensuring that government departments pay small and medium enterprises (SMEs) within 30 days, made during his recent State of the Nation address, should be embraced by South Africa’s small and medium enterprises (SME) sector.
This is according to Gerrie van Biljon, Executive Director at Business Partners Limited, who says that prompt payments by state departments will relieve the mounting pressure that SMEs are currently under, and may even alleviate the rate of SME closures in South Africa.
He says that while this announcement was first made four years ago, it is important for the President to reiterate the message. Late and protracted payments by state agencies have put many SMEs under unnecessary pressure over the past few years and, in many instances, led to the failure of otherwise sound companies.
“As it is estimated that small and medium-size enterprises generate half of gross domestic product (GDP) and nearly 60% of employment locally, this commitment is very positive for our economy. The proposed monthly reporting system that President Zuma discussed could go a long way in keeping track and monitoring the situation.”
He says that some government departments might not realise the negative effects that late payments can have on SMEs. “While payment delays can be easily absorbed by larger companies with access to credit, late payments could have potentially devastating consequences for small firms, which struggle with cash flows and cannot easily secure overdrafts or bridging finance.”
He says that while government’s commitment to paying on time should be welcomed, it is important for SMEs to remain vigilant and advises the following steps for business owners to protect themselves against late payments.
Negotiate payment terms with customers upfront
Van Biljon say that unfortunately, many small businesses are afraid to negotiate stringent payment terms upfront, for fear of losing a potentially large customer, such as a government department. Many large organisations know this and put pressure on suppliers to accept their often lengthy payment terms. “While it is not always easy to stand firm in these situations, failing to do so could result in massive dangers down the line.
“Make it clear to the customer what the credit terms are. If there is a difference between the two parties’ payment terms, don’t ignore the issue – discuss it and come to an agreement, otherwise it will arise later when it has become more critical to cashflow.”
Ensuring invoicing is done correctly and timeously
Before accepting an order or brief, van Biljon advises that the supplier should fully understand the meaning of all payment terms. “This includes particular requirements regarding invoicing, what references or order numbers should be quoted, what the procedures are for making payment, as well as whether the customer only accepts electronic invoicing. It is highly unlikely that the customer will pay before their standard terms, but it is advisable to discuss payment before in order to find out what flexibility they have.”
Take swift action on late payment
He says that many small businesses shy away from pressing large clients for payment as they fear it could damage the relationship they have with their client contact. “One option is to outsource invoicing and collections to an outside supplier, who is able to chase late payment on the supplier’s behalf. This will save the business owner’s time and effort of chasing overdue invoices, which is a distraction from running a business.”
Escalate issues soonest rather than later
Van Biljon says that it is sometimes advisable to escalate the issues internally so that the client’s senior staff is involved sooner rather than later. “This particularly applies at the first signs of a debt going bad, or if there are implications for other invoices or work already in progress. Establish a policy on how long an invoice is allowed to be outstanding before resorting to debt collection and when supply of goods or services would be stopped.”
Use the government late payment option
He says that SMEs experiencing late payments of more than 30 days after doing business with government can now call a hotline on 0860 766 3729 for assistance. “The hotline will provide SMEs and suppliers with a single point of contact to facilitate the speedy payment for services or products provided to the government.”