Late payments – the silent startup killer

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Quite often it isn’t the lack of customers or revenues that can kill a startup or seriously hamper its growth, but rather delayed payments and the unreliability of customers.

That is the view of Gerrie van Biljon, executive director at South African risk finance company Business Partners, which finances and invests in SMEs.

Van Biljon says irregular or delayed flows of payments from customers have a detrimental impact on the cash flow of South African small and medium enterprises (SMEs), severely restricting opportunities for expansion and job creation.

According to him, the way a business manages its working capital and the speed of its cash conversion cycle heavily impacts its overall profitability.

“Put simply, in order to produce and sell a product or service a business incurs costs including wages and raw materials, and if it doesn’t receive payment during a certain time period for the product it has manufactured, or the service it has provided, the business cannot purchase new material, pay staff or overheads,” he said.

The most recent SME Index, which measures confidence levels amongst local businesses, released by Business Partners found South African business owners have average confidence levels of 62 per cent that customers will pay them in the stipulated time frame, down seven per cent compared to the previous quarter.

Van Biljon says while larger companies can easily absorb payment delays as they have easier access to credit, late payments could have potentially devastating consequences for SMEs.

“The impact of late payments on an SME can often be similar to a worker only receiving half his salary at the end of the month, or no salary at all,” he said. “Without payment, the ability to pay bills, buy stock and pay wages is compromised, and can often have disastrous long-term consequences.”

He said cash resources are required to service a business owner’s financial obligations.

“Cash flow is like oxygen to a business, so without access to cash a business will die, or at the very least, stop growing.”

Local SME owners said late payment is an issue which they experience frequently, and were keen to know what type of strategies they can adopt to protect their businesses against this burden in future.

Van Biljon says SMEs should always try to diversify their client base, ensuring they are not reliant on one client. He also advises SME owners to assess clients very carefully before selling products or services on credit.

“Always ensure that they are creditworthy and will be able to pay for the product or services supplied,” he said.

“Businesses should also attempt to have some cash reserves available, or access to capital in place should a client not pay on time. Always have a contingency plan in place, so if clients do withhold payment the business has capital to fall back on.”

The usual culprits in terms of late payments, van Biljon said, are big corporates and government departments, usually as a result of bureaucratic payment processes and systems. He advises SMEs struggling with late payment to try as much as possible to sell products and services to clients on cash terms.

“This will reduce the amount of products sold on credit and reduce the risk of clients not paying in the stipulated time frame. Negotiate payment terms with customers buying on credit upfront and be decisive on what your terms of payment are – once you have decided on these payment terms be sure to enforce them across the entire client portfolio,” he said.

“Also ensure that your invoicing is done correctly, timeously and reflects all of your client’s guidelines and requirements – all the necessary information. This will reduce the back and forth and limit the time spent on the payment process.”

He also advised business owners to carefully model various scenarios that might result from the terms of payment they offer customers, and develop contingency plans in case the worst case scenario happens.

“They can also make use of bridging finance products should they find themselves in a difficult situation due to late payment,” he said.

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Passionate about the vibrant tech startups scene in Africa, Tom can usually be found sniffing out the continent's most exciting new companies and entrepreneurs, funding rounds and any other developments within the growing ecosystem.

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