Late payments squeeze small firms
October 25, 2007
By Tonny Mafu
Johannesburg - Delayed payments by the government and big corporations continue to stifle South Africa's small businesses, prompting them to source often expensive loans from banks to remain in business.
This is according to Business Partners, an incubator firm for small, medium and microenterprises (SMMEs).
Jo Schwenke, the managing director of Business Partners, said that if customers of small businesses, such as government departments, parastatals and big companies, made their payments on time, there would be no need for bridging finance - money borrowed from banks and other lenders to use as working capital while waiting for payment from customers.
"We have endless problems getting payment from the government," Schwenke added.
SMMEs were easily bullied into accepting payment periods of up to six months. He cited one listed retailer whose balance sheet showed R7 billion worth of funds owed to suppliers. Estimates show that small firms account for about 35 percent of the value of supplies to their bigger counterparts.
Khula Enterprise, a government small business financier, recently said it had bought 20 percent of Regent Factors in a bid to provide emerging entities with funds based on the contracts they got from their customers. This type of loan, on the strength of payment to be received from customers, is called factoring. Unlike conventional lending, factoring removes the need for collateral.
Kugan Pillay, the head of debtor finance at First National Bank (FNB), said that when providing this type of loans banks required credit information such as proof of equity. It could take up to two weeks to provide funding. The lack of information from SMMEs made it hard for banks to help.
Dennis Wilkinson, the chief executive of Regent Factors, said that under its factoring model, the time taken for a small entity to get funding would be reduced to 48 hours.
Factoring could help a lot of businesses that won tenders to fulfil these contracts and reduce the rate of failure.
But Schwenke warned: "In Business Partners, we are not in love with factoring; it has a lot of administration work." Factoring required sophisticated accounting resources, which many growing businesses were unlikely to afford.
Ashley Mathura, FNB's head of solutions for new business, said SMMEs could manage cash flow better if they understood the payment and receipt cycles.
By negotiating to extend the time they took to settle their own bills relative to how long it took for them to receive payment, they would be able to get cash to use as working capital.
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