Digital to solve the problem of delayed payment cycle for MSMEs ?

COVID 19 pandemic has posed multiple challenges. Especially at a national level, the Indian gross domestic product (GDP) growth suffered the largest slump of 23.9% in this last quarter. You may think that it’s the government’s expertise, and an individual contribution will not have much of an impact. But on the contrary, every single contribution, can make a difference. The influx of money into the system through the growth of businesses can, in turn, activate a multiplier effect.

While every business aspires to grow to its maximum potential, some factors hinder this progress. One such factor is the delayed payment cycle. Most of the MSMEs and other businesses spend a lot of time and resources on the collection of dues/accounts-receivables that are generally not paid on-time. Often, company founders, directors, owners, and staff spend a considerable amount of time collecting dues. This is an unproductive use of resources that can otherwise get used for operational work and business expansion. 

Challenges of late and non-payments
Since relationships are a critical aspect for businesses, addressing the challenge of late and non-payments becomes a heartache, as one needs to handle it delicately. Some of the commonly used reasons for non-payment/delayed payment are genuine, like not getting paid themselves on time, but some do not seem very reasonable, for example:  

• “Our approval authority is not in town, we will get back to you next week” – हमारा अनुमोदन प्राधिकरण शहर में नहीं है, हम अगले सप्ताह आपको भुगतान करेंगे
• “This month’s business is low, we can only pay you next month” – इस माह के व्यापार कम है, हम केवल आप अगले महीने भुगतान कर सकते हैं
• “There is a problem in our accounting system, we will pay once it is sorted” – हमारे accounting system में एक समस्या है, हम इसे हल करने के बाद भुगतान करेंगे

Certainly, a lot of business owners would have come across such responses while trying to collect customer dues in their day-to-day operations. To mitigate the loss associated with late & default payments, companies build the overdue and non-payments margin in their pricing and pass it on to their customers. In all cases, the impact of delayed payments is undeniable, affecting cash flows and creating a delay in payments to other dependents like suppliers, vendors, and employees. 

One of the reputed companies in trade credit insurances states in its recent report that 58% of B2B payments in India get received past the due date, and 2.4% are uncollected (written off). It is estimated that over 80% of businesses that are shutting down are due to cash flow problems. Overall, the network effect is so huge that it creates unrest among a significant number of institutions in the MSME sector.

Motivating the customers to pay their dues on-time
This problem has been well tackled in the banking sector by credit bureaus. Customers have an incentive to pay on time, or else, it impacts their credit rating negatively. Banks heavily rely on the payment history of borrowers with other banking institutions in making credit/loan decisions. While there is an existing government platform that tackles extreme cases of late payments, the Ministry of MSME also indicated a possible solution on the similar lines of credit bureaus. But, one of the challenges of replicating the solution similar to credit bureaus in the MSME sector would be to deal with the unorganized or semi-organized way of conducting businesses. 

Primarily, it should be in the interest of MSME to adopt the best practices to deal with the customer dues collections. With the small-sized and semi-organized nature of MSMEs, it is important to prioritize the time they spend on different functions of the business.

Digital solution for a digitally forward nation
In this new digital age, it is just a click away to find the right and effective digital platforms for businesses to collect customer dues easily. It would help MSMEs immensely to transition from worrying about the cash register to strategizing for the overall growth of their business. The practice of outsourcing collections to digital platforms would not only help collect dues faster but also help maintain better business relationships as they are no more dealing with collections directly. The bigger picture is that the adoption of such best practices by MSMEs will certainly have a positive impact on business growth. Thus, leading to an affirmative social and economic impact.

Authored by Winny Patro, CEO & Co-founder, Recordent