Small to medium-sized enterprises (SMEs) are often referred to as the backbone of the economy. However, with cash-flow issues largely causing more than half to fail during their first five years in business, it’s obvious that many are in need of a lifeline. But what exactly is the cause of these cashflow issues?
Ask any SME and they’re likely to blame late payments.
Sometimes referred to as “the assassins of small businesses,” late payments cost SMEs as much as $3 trillion globally, with 1 in 10 invoices failing to be paid on time. The culprits behind these late payments? It’s not struggling SMEs with limited capital, but large corporations who, despite having significant financial resources, force long remittance cycles — as long as 120 days — to strongarm SMEs into waiting for payment as a commonplace business practice.
While beneficial for larger corporations in terms of maximizing capital, these unreasonably long cycles cause an unnecessary and costly administrative burden that is especially cogent for SMEs, who don’t have the additional funds lying around to support their business operations or pay their employees. This places SMEs in a Catch-22 situation where they need the big contracts and eventual large payouts from corporations to succeed, but working with these large corporations often results in incurring debt while smaller businesses wait out long remittance cycles.
So, what’s the solution? Essentially, it boils down to negotiation and choice. SMEs need the freedom and choice to negotiate reasonable payment terms, and large corporations need to work to empower this. Unfortunately, this is not realistic; after all, why would large corporations budge when it comes to a situation that’s beneficial to them?
Luckily for struggling SMEs, we’re starting to see a shift, with the common practice of long remittance cycles fast becoming viewed as poor business ethics. We’re even seeing businesses that engage in these practices starting to feel the backlash.
For example, Rio Tinto, a leading global mining group, and Telstra, Asia-Pacific’s leading telecommunications provider recently came under fire for teaming with Silicon-Valley-based Taulia to bolster their cash flow at the expense of their SME suppliers.
Unsurprisingly, these dishonest and unethical business practices have led to an uproar, resulting in an investigation by two of Australia’s small business and consumer watchdogs. A key financier, Greensill Capital, also withdrew its support, putting Taulia’s future as a company in jeopardy.
While this is only one example, it shows the ramifications of poor business ethics, particularly around forcing long remittance cycles and taking advantage of smaller suppliers. Unfortunately, though, it’s not reasonable for SMEs to start a witch hunt every time a large company forces a long remittance cycle. So, what can SMEs realistically do to ensure everyone wins?
The most obvious is including an interest clause or a fixed-sum penalty fee on late payments, which factor in administrative costs associated with recovering debts to deter larger corporations from delaying payment for fear of incurring additional costs.
A great example of this is seen in many businesses across the world that offer a pay-on-time discount, which is essentially an invoice that outlines the “discounted” cost if a customer pays by the due date, and the increased cost if the invoice is settled after the due date. The prospect of savings is often enough to ensure prompt payment.
Other avenues, such as percentage payments to begin work with the remainder due on completion, also ensure SMEs have enough cash flow to cover expenses throughout longer engagements. This is an especially effective avenue for bootstrapped companies that may just be starting out and don’t have the capital to cover all aspects of the work from the outset.
Dedicated low-interest invoice financing solutions are another option that can help SMEs avoid cash-flow bottlenecks. Invoice financing often works through two avenues: dedicated lenders or invoice financing marketplaces. Working with an established lender is a good idea in terms of reliability because invoice financing is their bread and butter, but invoice financing marketplaces are another good option. They offer some of the best rates because lenders have to compete with interest rates, and so long as the marketplace vets its funders appropriately, it can offer the same reliability as dedicated lenders.
Ideally, larger corporations will take the Rio Tinto and Taulia lessons of the world to heart, shifting their focus to a more ethical way of operating. Through enabling the open negotiation of reasonable payment terms for SMEs, positive, productive working relationships will be forged, creating a business economy where corporations avoid risk to their reputation and overall business and SMEs are able to thrive and prosper. If large companies work with SMEs, instead of against them, everyone wins.