Opinion piece in The Sowetan on how to solve the late payments scourge

Tuesday's edition of The Sowetan published my opinion piece on how we can help small businesses deal with the scourge of late payments. The three proposals are: support the Prompt Payment Code; introduce Supply Chain Finance as the norm for procurement by government and big business; and establish a Small Enterprises Ombudsman to resolve disputes quickly and cheaply.

You can read it here, or the full unedited text below or click on the link here.

It is estimated that small and medium-size enterprises (SMEs) generate up to half of gross domestic product (GDP) and nearly 60% of employment in SA.  90% of all new jobs will be created by SMEs by 2030, according to the National Development Plan (NDP). Thus with 9.3 million people unemployed, supporting these SMEs is critical.

In February 2016 government pledged to partner with private business in setting up a fund to provide capital to this sector. Big business raised R1,4 billion to establish the SA SME Fund which is barely operational and failed to attract equivalent government funding. Instead, February’s budget announced a R2,1 billion start-up fund but with little detail on its mandate or strategy.

The initial start-up funding required by SMEs was below R100,000 for more than half (62%) of businesses surveyed in a 2015 report in SA, with only 4% raising more than R1,000,000. However, investment funding is only one side of the coin, the other important component is cash flow or working capital. When business owners refer to “access to finance” as a critical constraint to growth, they are more often than not referring to working capital not investment capital.

Cash flow makes or breaks a small business. If one does not have the cash to pay expenses and salaries, then one’s business can’t survive. Simply put: no cash equals no business. This is a reality even if a small business has all the customers it wants and talented employees who do their jobs well.

A small business, low on cash will make late payments to suppliers and employees and often miss tax payment deadlines, so incurring costly penalties. It can’t pay what it doesn’t have. Unfortunately, this leads to more problems that eventually reach a point when there’s no saving the business.

President Ramaphosa highlighted the issue of late payments during his 2018 State of the Nation Address, pointing out that government should remove barriers to entry to small businesses. He stated that: “It is clear that the failure of some government departments to pay suppliers within 30 days has a devastating impact on small and medium-sized businesses. This is something that I want to see addressed as I visit government departments, because the culture of late payment has gone on for far too long and has caused far too much damage, particularly to emerging black businesses”.

As of December 2017, Government and SOEs owed their suppliers R7,7 billion in unpaid invoices. This is money which is lost to the economy and should instead be circulating within the supply chains of small and medium enterprises.

The State of South African Small Business report in 2017, confirms that cash flow is the second biggest challenge small businesses face and 35% of respondents said that cash flow issues “keeps them up at night”. A recent Sage study “Late Payment: The Domino Effect” found “more than 8% of payments due to the country’s Small & Medium Businesses are never made or made so late that businesses are forced to write them off as bad debt.”. The report continues by highlighting that “52% of South African Small & Medium Businesses experience direct negative impacts from late payments.

As a consequence of late payments, 34% of SMEs say they pay suppliers late, causing a domino effect impacting other smaller businesses creating a vicious circle of late payments. 28% say they delay investments into their businesses which impacts on the future growth of SMEs.

Following up on late payments is also a major constraint for small business with SMEs spending an average of 20-man days a year doing this and incurring more than R48,000 in costs chasing overdue debtors. Additionally, SMEs point out that the main barrier to chase late payments in South Africa (40% of respondents) is the “protection of client relationships”, which again demonstrates the disadvantage SMEs have in receiving payment due to them.

To address these problems, I am drawing attention to a suite of solutions which in combination will provide small business owners with relief from the constant bullying they suffer at the hands of uncaring government and big business. Yes, big business is a culprit but disputes occur under the radar so go unreported and small businesses suffer in silence or quietly disappear.

The National Small Business Chamber (NSBC) has championed the Prompt Payment Code which strives to ensure payments to SME suppliers within 30 days. The DA fully endorses this Code. The Code is a commitment, not a legally enforceable obligation. It focusses rather on the reputational gains corporate or government bodies can obtain from good business practices. Additionally, the commitment is a “statement about your business ethics and you’re allowing your suppliers to measure your actions against your words”.

Late payments are often due to customers preserving their own cash flow at the expense of their suppliers. Supply Chain Finance (SCF) is a mechanism that improves cash flow across the supply chain. SCF, sometimes referred to as reverse factoring, allows an SME supplier to secure its money earlier by piggybacking on the creditworthiness of a buyer. While relatively new in South Africa, it is widely adopted in the USA, UK and other developed economies. SCF can unlock billions of rands of working capital across supply chains in all sectors of the economy, and so help small businesses grow and create more jobs.

I will soon be introducing the Small Enterprises Ombud Service Private Member’s Bill, establishing an ombudsman to resolve disputes quickly, cheaply and efficiently. Parliament’s Portfolio Committee on Small Business Development has attempted to perform the function of an ombud over the past few years as we are inundated by complaints from business owners who have nowhere else to turn. Notice of this bill was gazetted on May 10^th, giving 30 days for comments and suggestions before the final bill is drafted.

These three interventions are practical, achievable means by which small businesses can address some of the most pressing challenges facing them. In the coming months I will be working hard to achieve a bi-partisan consensus around implementation of these proposals.

Small business owners in South Africa deserve nothing less.