Late payments can kill a small business. But worldwide few initiatives to address timely payments seem to work. Proposed new regulations in South Africa to effect building contractors are however a step in the right direction.
The proposal, which is out for public comment, would allow contractors who have not been paid by those in the private or public sector to suspend projects until payment is received and charge interest at the prime lending rate plus 6% .
This might help. Late payments often force firms to take out costly finance to cover cash shortages. There is also evidence that late payments lead to more firms closing (at least from an EU study last year) .
Follows EU directive
The proposal by South Africa's Construction Industry Development Board is similar to an EU directive in 2011 that allows contractors to levy an interest rate of 8% above the European Central Bank's reference on companies and public entities that pay late. Firms can also claim compensation from the debtor.
The construction proposal follows an announcement in April by South Africa's cabinet of the formation of a new unit within the Department of Planning, Monitoring and Evaluation to monitor payments, which by law must be made by the government to contractors within 30 days upon receipt of invoice.
No public servant has been sanctioned over late payments, despite the rule being part of the Public Finance Management Act (see this earlier post).
The unit will complement a call centre run by the country's Small Enterprise Development Agency (Seda) which helps small businesses to get late payments settled. Since its launch in 2009 over 20,000 business owners have been helped.
Things are bad. The cabinet revealed in April that while about 71% of invoices filed to national departments between January 2013 and October last year were paid within 30 days, just 40% of those filed to provincial departments were honoured within the stipulated time. The situation is likely worse in municipalities, with many plagued by financial and capacity issues.
So much for the carrot?
There are two general ways to tackle late payments - either by the carrot or by the stick method.
In the first government entities and companies that pay on time are honoured in the hope that a culture of timely payment is developed. An example of this is the Prompt Payment Code, a private initiative supported by the UK government, where companies pledge to pay on time. It has over 1,700 signatories.
In Chile the government has since 2011 run a similar campaign, Sello ProPyme. At present it has 114 signatories which the government says will benefit at least 95,000 small firms.
Yet the two initiatives have not stopped late payments in their respective countries.
In the UK financiers C2FO noted earlier this year that despite the code having been endorsed by most big companies late payments persist - often because firms lower in the supply chain hold back on payment.
A proposal by the Department for Business, Innovation & Skills’s now seeks to require corporations, from April next year, to publish information detailing how long they take to pay their suppliers.
And in Chile in March the then economy minister Luis Felipe Céspedes said that his department was studying possible modifications to Sello ProPyme which some say has had little effect because there are no repercussions for offenders.
The initiative also appears to be running out of steam - just 14 signatories were added last year. It's not as bad as a South African business association's attempts to copy the UK's Prompt Payment Initiative. The SA initiative has just seven signatories, despite having been initiated almost three years ago.
More of the stick
Perhaps then taking a more interventionist approach could help. In India, small business owners can take big companies or public entities that don't pay on time to a special courts called facilitation councils, set up under the 2006 MSME Development Act.
Theoretically it's great. A big company or department found to have paid late, must pay interest of three times the current bank interest rate.
Big companies or departments can appeal a late payment, but must deposit 75% of the amount before moving to court, to avoid them simply taking the case on appeal as a delay tactic.
But to have any effect councils have be located as close as possible to where businesses operate. With India's size this can often prove a problem. A further challenge is that business owners (particularly those overly reliant on one customer) may fear using the councils because they fear losing business.
Last year the president of the Federation of Indian Micro and Small & Medium Enterprises (Fisme), D Gandhikumar (pictured above) called for facilitation councils to be given more teeth - presently the councils can't summon defaulting public sector undertakings who are accused of a late payment.
A better way?
In the end there doesn't seem to be one simple way to ensure that small businesses are paid on time by the government and big companies. Better payment systems and a culture of paying on time would help as would ensuring that cases brought to courts over payment are resolved more speedily.
In countries with better business climates and more effective governments, payments are made more speedily by the public sector to firms. In the earlier cited EU study, Nordic nations out performance Mediterranean ones when it comes to governments paying faster and more on time.
Timm is a South African who writes on small business in emerging economies. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a