Two years ago, the Small Business Institute (SBI) sent letters to 100 of the JSE’s largest companies, asking them to share with us their payment terms for the small businesses in their supply chain.
Only 38 took the time to respond. Nine told us they paid in fewer than 30 days (only one had special terms for SMEs), but only four said their payment terms were public information. The rest claimed confidentiality over the information.
That same week, a large listed company announced to great fanfare that it was going to help incubate 10 000 small businesses as part of its “corporate social responsibility”.
Two weeks later, it pushed out its payments to 120 days for SMEs. Presumably, it was not their responsibility to support key stakeholders with necessary cash flow to remain in business.
Just prior to lockdown, we met with several shareholder activists and the JSE to escalate our campaign to link prompt payment with good governance, sustainability and disclosure rules.
Our proposition was simple: big businesses (and government, for that matter) are not doing SMEs a favour by procuring from them.
The relationship is symbiotic, allowing the big guy to do what it does and, ideally, fortifying the small guy to one day become big. Along the way, jobs are created, new businesses spring up, and we see and appreciate the innovation, hustle and energy that fuels an economy.
Therefore, the SBI welcomes the new commitment by more than 50 companies to pay suppliers within 30 days. The tireless work of the many partners in Business for SA has not let the crisis go to waste and has made our campaign a reality.
For those SMEs left standing, this could be a watershed moment for their owners, their employees and the hundreds of thousands – if not millions – of people dependent on them for their livelihoods.
If one good thing comes out of the Covid-19 pandemic that probably caused about 55 000 SMEs to close their doors, it might well be this.
Earlier this year in Parliament, Deputy Small Business Development Minister Nokuzola Capa, who is trying to coordinate better payment by government departments, linked the Global Entrepreneurship Monitor (GEM) 2019/20 global report, which shows that the country’s average business discontinuance rate is higher than established business ownership or formation rate, to late payments.
The department’s minister, Khumbudzo Ntshavheni, also relayed in her budget speech the worry that in sectors where late payment is rife, SMEs face increased barriers to entry and thus reduced competition in those sectors.
The GEM report concluded that “the business environment may simply not be conducive to enabling their development over time”.
And this was before Covid-19. The headwinds were already blowing and included load shedding, the downgrade of our sovereign debt and the mille feuille red tape.
There are plenty of stories about small businesses unable or unwilling to confront late payers (fear of retribution; the time and costs of collection), leading to anguish for the vulnerable owners who cannot get credit without quality receivables; cannot pay themselves, their employees or their suppliers; cannot invest in new equipment, raw materials, or marketing; and cannot build up inventory or, worse, could have their assets repossessed.
Since 98.5% of businesses are categorised as small, ensuring their survival and their growth is the only path we have to economic recovery and job creation. We know that billions were owed to them by the various tiers of government at the time of lockdown.
Presumably millions, or billions, more were owed to them by big businesses (we do not know since the information is “confidential”).
Nearly 40% of SMEs we surveyed in April thought they would survive the harsh economic closure provoked by lockdown measures had they simply been paid for what they had already delivered to their clients.
SBI prefers carrots to sticks, but the cudgels being employed in other jurisdictions are well documented. Some include the UK government’s proposals issued last month that order companies to pay suppliers or face fines; launch investigations into suspected bad payment practice without the need to have first received a complaint from a small business; and compel companies to share information during an investigation.
This is on top of the requirement for all businesses dealing with government to transparently report their payment terms twice a year or face criminal prosecution.
In India, companies are liable for fines and every officer of a company in default of payment terms may be punished with a prison term that “may extend to six months”, and Kenya has been considering enforcing interest on late payments to suppliers by large retailers.
Many countries have initiated prompt payment codes, such as in Scotland, where more than 590 businesses have committed to prompt payments. Australia has signed up more than 140.
Committing to paying SMEs in 30 days or less is the first step. Measurement – and reporting – will matter, moving enterprise development away from a simple tick-box exercise.
So how does a new show of solidarity between businesses large and small become an effective means of fuelling GDP growth?
By not just rejecting the use of SMEs as a line of credit, but by creating and implementing modern systems government too can employ to keep SMEs in business. It is a chance for big business to assist government to do more than pay SMEs promptly, not just pay them lip service.
In the era of the fourth industrial revolution, digital solutions can assist SMEs to invoice properly and track their payments, optimising working capital and operational efficiency.
Examples of digital payment initiation, infrastructure and information include smart contracts, which can issue micropayments as input costs for goods and services are accrued.
Digitisation can also remove layers of administration and approvals, which limits avenues for corruption and offers cost reductions for both sides.
Keeping a small business alive will be smarter in the end for big business than building new ones to fulfil orders. We can only agree with Capa, who said: “My plea is that business will take on the challenge, like us in government, and work towards the development of a prompt payment code to SME suppliers.”
The commitment by more than 50 of South Africa’s largest corporates is the first step, which we applaud.
Dludlu is CEO of the SBI