Cash flow is the lifeblood of any business, but for South African small, and medium-sized enterprises (SMEs), it is often the biggest challenge. Late payments from clients can cause severe financial strain, making it difficult to pay suppliers, employees, and operational costs. It has been reported that 91% of South African SMEs experience late payments, with many invoices remaining unpaid for more than 30 days. This delay significantly hampers business growth, forcing some to close their doors permanently.
The impact of late Payments on SMEs
Late payments create a domino effect that can cripple SMEs. Businesses rely on steady cash flow to sustain daily operations.
When payments are delayed:
- Operational strain: SMEs struggle to cover fixed costs such as rent, salaries, and inventory replenishment.
- Limited growth opportunities: cash constraints mean SMEs cannot reinvest in their business, hindering expansion and innovation.
- Increased borrowing costs: many businesses resort to high-interest loans or overdrafts to bridge the gap, leading to unnecessary financial burdens.
- Supply chain disruptions: SMEs unable to pay their suppliers on time may lose crucial relationships, impacting their ability to deliver goods or services.
How SMEs Can Mitigate Late Payments
While the late payment culture may seem inevitable, SMEs can take proactive steps to protect themselves and improve their cash flow resilience.
- Strengthen Contracts with Clear Payment Terms
One of the most effective ways to combat late payments is by having robust contracts. SMEs should ensure that:
Payment terms are explicitly stated, with clear due date (e.g. “payment due within 30 days of invoice date”).
Late payment penalties or interest charges are included to discourage delayed settlements.
Clients acknowledge the payment terms upfront by signing agreements before work commence.
- Invoice Promptly and Follow Up Regularly
Many SMEs delay sending invoices, which in turn delays payments. Best practices include:
Sending invoices immediately after delivering a product or service.
Using automated invoicing software to streamline the process and track payments.
Implementing a structured follow-up system with reminders at 7, 14, and 30 days.
- Offer Early Payment Discounts and Incentives
Encouraging clients to pay early can be beneficial. SMEs can offer small discounts for early payments, such as a 2% discount if paid within 10 days. This incentivizes timely payments and improves cash flow.
- Partner with Credit Guarantee Insurance Corporation (CGIC)
One of the most effective safeguards against late payments and bad debt is trade credit insurance from credit guarantee insurance corporation. By insuring their receivables, SMEs can:
- Protect their cash flow against client defaults or insolvency.
- Extend credit confidently, knowing that potential losses are covered.
- Access valuable insights and credit assessments on prospective and current clients.
- Strengthen relationships with financiers, who view insured receivables more favourably when extending working capital facilities.
CGIC’s solutions are tailored for South African businesses and designed to foster resilience, especially in turbulent economic conditions.
- Consider Invoice Financing
Invoice financing allows businesses to sell their outstanding invoices to a financial institution at a discount. This provides immediate cash while transferring the collection responsibility to the lender. SMEs with CGIC credit insurance may find it easier to secure better terms from financiers, as insured invoices carry less risk.
- Conduct Credit Checks on Clients
Before extending credit to a client, SMEs should conduct due diligence by assessing a client’s creditworthiness. Through CGIC’s in-depth credit analysis tools and risk grading systems, businesses can evaluate customers more accurately and avoid high-risk debtors.
- Implement Digital Payment Solutions
Offering multiple payment options, such as credit cards, EFTs, or mobile payments, makes it easier for clients to settle their accounts quickly. Automating payment processes can also reduce friction in transactions.
The Role of Policy and Industry Advocacy
While SMEs can take proactive measures, broader industry action is required to address the late payment culture. Large corporations and government agencies should commit to prompt payment practices. Stricter regulations and penalties for late payers would help protect SMEs from financial distress.
Trade credit insurance from credit guarantee insurance corporation offers an added layer of security, empowering SMEs to trade with confidence, reduce financial exposure, and unlock new growth opportunities.
Late payments are a significant threat to South African SMEs, but businesses can take strategic steps to mitigate their impact. Strengthening contracts, leveraging invoice financing, offering early payment incentives, and utilizing digital solutions can improve cash flow resilience. By proactive and enforcing strict payment policies, SMEs can navigate financial challenges and focus on sustainable growth. Ensuring financial stability through better payment practices will not only benefit SMEs but also contribute to the overall economic growth of South Africa.
