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Despite a legal requirement that invoices and claims be paid within 30 days or within the period contractually agreed upon, a Public Service Commission (PSC) report has revealed that South African small, medium and micro enterprises (SMMEs) are owed billions in unpaid invoices by Government departments. The report is based on grievances handled by the PSC from 1 January to 31 March 2020.

Underscoring this concern by business owners are results of the second quarter 2020 Business Partners Limited SME Index, which revealed that respondents have confidence levels of only 50 percent that their clients will pay them within the stipulated time – 12 percentage points lower when compared to the levels recorded in the second quarter of 2019.

Noting the detrimental impact that irregular or delayed flows of payments can have on an SMME’s cashflow, Gugu Mjadu, Executive General Manager: Marketing at BUSINESS/PARTNERS – one of Africa’s leading risk finance companies for small businesses – is urging both Government and the private sector to address this unsustainable culture of late payments.

“While payment delays may be easily absorbed by larger companies with better access to credit, the consequences for smaller businesses can be devastating – especially considering the financial strain that many of these companies are already under due to the COVID-19 pandemic and ensuing national lockdown,” says Mjadu.

Timely Payments Key to SMME Survival

This, she explains, is because cashflow is like oxygen to SMMEs.

“For a smaller business, cashflow is required to service their short-term financial obligations – like paying bills and buying stock – so without it, the business will die or, at the very least, stop growing.

“And unfortunately, the guilty culprits of not processing payments speedily enough tend to be big corporates and Government departments,” she adds, noting intricate and bureaucratic payment processes and systems as the likely cause of this.

“There have, however, also been reports of corporates delaying payments as a result of COVID-19-related issues. While the impacts of the pandemic have understandably been far-reaching, these large-scale businesses cannot pass the buck onto smaller suppliers, who depend on timely payments to keep running. Some delays could also be due to investigations currently taking place around COVID-19 procurement.”

Mjadu offers SMMEs some advice on how to prevent and handle late payments:

1. Negotiate payment terms with customers upfront
Many SMMEs are afraid to negotiate stringent payment terms upfront for fear of losing a potentially large customer. Often large organisations exploit this weakness and put pressure on suppliers to accept their often-lengthy payment terms.

It is key to be assertive and make the credit terms clear from the start. This should include requirements regarding invoicing, what references or order numbers should be quoted, procedures involved for making payment, and 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.

2. Take swift action on late payment
SMME owners often avoid pressing clients for payment as they fear it could damage their relationship. To avoid this, one option is to outsource invoicing and collections to an outside supplier who can chase late payment on their behalf. In the case of public sector late payers, SMME owners can consider contacting the government payment hotline. This will also save the business owner’s time and effort chasing overdue invoices, which can be a distraction from running a business.

3. Escalate issues sooner rather than later
If an invoice goes unpaid, start by escalating the issue internally so that the client’s senior staff are involved at the first sign of problems. Establish a clear policy on how long an invoice can remain be outstanding before resorting to debt collection and when supply of goods or services should be stopped.

Late payments threaten any SMME’s ability to trade, as well as stifle potential for growth and recruitment, and while being understanding with a struggling client can be good for building the relationship, being firm on payment collection does not necessarily have to have the opposite effect.

4. Seek legal advice
If all else fails, you may need to consider legal action by consulting a debt collection company or a lawyer to press charges. Before taking this step, however, it is important to perform an honest cost analysis that weighs up whether the legal fees incurred would be worth the risk, or if you should instead cut your losses and write off the debt.

For SMME owners who are currently experiencing late payments of more than 30 days after doing business with the Government, Mjadu advises to call the dedicated hotline. “This hotline, available on 0860 766 3729 (0860 SMME PAY), is intended to assist SMMEs and suppliers by providing a single point of contact to facilitate the speedy payment for services or products provided to the government,” she concludes.

About the Author: Gugu Mjadu

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Gugu Mjadu is our Executive General Manager: Marketing. As a daughter to entrepreneurs, Gugu is a passionate about entrepreneurship and supporting entrepreneurs to succeed. She has been working in the entrepreneurship space since 2003. One of Gugu’s proudest moments at Business Partners Ltd was leading the rebranding of the company in 2014. Gugu is interested in the advancement of rural areas and early childhood development. Gugu is our go-to-spokesperson for our SME sector lobbying initiatives, youth and female entrepreneurship, marketing, and mentorship articles.