The true effects of late payment on SMEs

Late payment, in its various forms, is essentially a demand for credit. The appeal to buyers stems from the fact that it is cheaper and more flexible than loans. And its appeal to suppliers is that it provides them with a claim on their customers’ future business.

In an ideal world, where all solvent businesses would have prompt, uninterrupted access to finance from diverse sources, late payment would be very rare and its risk to businesses would be manageable. Suppliers would factor it into the cost of doing business and costconscious buyers would keep payment as prompt as possible. Moreover, regulation would be unnecessary.

However, this ideal world, of course, is very far removed from the reality of business, especially in emerging markets like the Caribbean. Smaller businesses, in particular, face significant financial constraints which make late payment much more than simply a ‘cost of doing business’.

Around the world, the reach of alternative finance (including invoice finance and trade credit insurance) is growing fast, but is still relatively limited.

Although late payment can be rationalised, it is also extremely inefficient for the economy through increased costs, reduced hiring and capital spending and the failure of suppliers. The impact on this business segment can be seen clearly in subdued job creation and investment.

In difficult market conditions like the depths of a recession, the chance that an SME will report late payment more than doubles, while large corporates, which are normally less affected, see an even bigger increase.

Late payment and customer defaults can move along the supply chain, crossing industries and borders until they are absorbed by the most financially secure financial institutions, or indeed governments.

Ending ‘late payment’ is a worthy ambition shared by many governments, stakeholders and individual businesses around the world. Some objectives for government intervention designed to deal with the negative aspects of late payment without compromising economic growth include: 1. To dampen the systemic impact of late payment on the economy, by encouraging ‘deep pockets’ (eg financial services firms or tax authorities) with a stake in the entire supply chain.

2. To ensure that the legal and policy frameworks around incorporation, financing, contracts and insolvency and are aligned in order to deal with different aspects of late payment promptly and in a consistent manner.

3. To encourage trade credit by giving suppliers a minimum level of protection against supplier dilution – ie the reassurance that even when customers fail they can still look forward to a minimum level of recoveries.

4. To ensure that businesses can look forward to a similar level of discretion in negotiating credit terms with their customers regardless of whether they are new or repeat suppliers.

5. To encourage the development of financial markets so that businesses have quick access to alternative financing options in response to changing terms of credit or unexpected late payment.

Unfortunately, the problem of late payment has long resisted a simple definition, and a solution has remained elusive for all but a handful of countries.

Late payment is often understood as a solely negative aspect in business, this is not always necessarily the case. It can also be a useful tool for business growth. Only when this complexity is understood can appropriate responses be developed to address the aspects of late payment which do impact negatively on businesses.

Tackling and managing late payment is a complex policy issue. But is also an issue in which the accountancy profession can play an important influential role.

This is because of the unique position accountants possess, and especially because accountants are seen as small business’s most trusted advisors. Indeed, many accountants are small businesses themselves. Many accountants are reviewing what works and what needs to evolve in their role as businesses’ most trusted advisers – especially in the face of technological innovations and changing business practices, alongside the challenging needs of start-ups.

Professional accountants around the world lead the fight for prompt payment, ensuring that businesses are protected from customer defaults and can cope with interrupted cash flows. Accountants can provide discipline for entrepreneurs and SME. This discipline, alongside business planning is a skill that can help entrepreneurs and SMEs get off the ground and sustain their business.

For the finance professional, understanding developments such as crowdfunding, are all crucial to staying abreast of the new ways of doing business in the 21st century.

Whether we like it or not, late payment remains part of the business equation for the moment.