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Policymakers involved in SME financing need to rethink how they manage and regulate trade credit and late payment, says ACCA in the final instalment of our three part research into late payment called Ending Late Payment.

ACCA believes that governments and their policy-makers have a big responsibility to build a financial infrastructure that diminishes late payment, and boosts trade credit.

This is because late payment is a life-threatening challenge for many businesses around the world and its impact on the weakest of businesses is acute – those with fewer than 50 employees are typically twice as likely as large corporates to report problems with late payment.

Rosana Mirkovic, SME policy adviser at ACCA, says: ‘For many, late payment is a fact of business life. At its most basic, late payment is a form of credit and in an ideal world, where all solvent businesses would have prompt, uninterrupted access to finance from diverse sources, late payment would be very rare. It would present only a manageable risk to businesses.

‘We need to revisit late payment habits. Policymakers can greatly improve access to trade credit and discourage late payment by improving the efficiency of the courts, and by providing arbitration and alternative redress options for businesses. These are all important objectives, but for trade credit regulation to be more widely effective, the onus cannot be solely on suppliers to report and police late payment.’

Ending Late Payment looks at how suppliers and buyers can improve the situation, by working more closely together and by investing in customer / client relationships. On the supplier side, they can protect themselves through careful due diligence, and by understanding the administration of their operations.

On the buyer’s side, they can protect themselves by signing up to prompt payment codes and sticking to them. In the interests of their own long term sustainability, they need to monitor the financial health of their supply chains and be vigilant.

The report also offers nine conditions that need to be met if trade credit is to be sustainable:

  1. Buyers’ and suppliers’ standard terms of credit should be transparent.
  2. Cash flows to suppliers should be predictable through explicit credit policies and contract terms.
  3. Invoicing, collections, accounts payable and invoice dispute processes should be efficient and transparent, with senior staff taking responsibility.
  4. The status of invoices should be easily monitored throughout their lifetime.
  5. Suppliers should be aware of the cost of providing credit to customers.
  6. Differentiated pricing should reflect the suppliers’ cost of capital, so that neither they nor their prompt-paying customers are forced to subsidise late payers in the long term
  7. Customers and suppliers should give each other adequate notice before seeking new terms of credit, so that alternative financing can be sought in time.
  8. Suppliers should seek to understand, and customers should be honest about, the causes of late payment and the viability of late paying customers.
  9. Payment plans should be set out explicitly in contract terms and genuinely troubled customers should opt for these rather than resorting to late payment.

Rosana Mirkovic concludes: ‘Ending late payment has been an elusive goal for many governments across the world. What governments need to bear in mind is that late payment, in its various forms, is essentially a demand for credit. As such, their efforts need to concentrate on building a financial infrastructure that will mitigate late payment and boost trade credit through support of alternative finance and availability of credit information, for example.

‘This approach goes much wider than improving the legal framework and ensures that government policy makes a positive difference much earlier than when supplier relationships are beyond repair or when customers fail.’

Article contributed by ACCA In Practice