Smallest firms hit hardest by late paying clients: ACCA

• Small businesses in APAC are often short-changed
• Latest report includes objectives for government intervention

BUSINESSES with fewer than 50 employees are typically twice as likely as large corporates to report problems with late payment, according to a new report from ACCA (the Association of Chartered Certified Accountants).
 
The study found that while the Asia Pacific markets have a strong record in securing prompt-payment on average, this is propped up by high-performing mid-market firms, ACCA said in a statement.
 
According to Charlotte Chung, senior policy adviser on SME (small and medium enterprise) issues at ACCA, small businesses in those regions are often short-changed in comparison with their larger competitors.
 
“While the Asia-Pacific markets have among the lowest rates of late payment on average, microbusinesses and other small enterprises in the region were far more likely, compared with those in other regions, to report late payment.
 
“This is primarily due to the uncertain fiscal outlook in those markets which forces businesses to hoard cash,” she said.
 
Chung cautioned that the cumulative impact of persistent late payment on small business activity can be very significant.
 
“Late payment hurts individual businesses and the wider economy in a number of ways, from increased costs to reduced capital spending or suppliers going out of business.
 
“What’s more, its impact is exacerbated among credit-constrained businesses,” she said.
 
“Unsurprisingly, it is the headcount and investment decisions of smaller businesses that are most sensitive to late payment.
 
“Late payment and customer defaults can cascade down the supply chain, crossing industries and borders until they reach the most financially secure financial institutions, which in many cases involves the government,” she added.
 
While these findings may point to late payment being a wholly harmful business practice that requires hard action to remedy, ACCA advises care be taken by policymakers.
 
The report identifies a very large share of business to business trade that makes use of trade credit – where payment is not made at the time when goods or services are delivered, but rather at a later date, usually agreed in advance by the two parties.
 
The important role late payment plays in economic growth means it requires a nuanced legislative touch from policymakers, according to Chung.
 
“Late payment is often understood as a solely negative aspect in business, but this is not necessarily the case. It can also be a useful tool for business growth.
 
“Only when this complexity is understood can appropriate responses will developed to address the aspects of late payment which do impact negatively on businesses.
 
“ACCA has identified 13 types of deviations from prompt payment, each of which calls for a different approach from businesses and policymakers. Failing to distinguish between them will lead to poor policies that run the risk of doing more harm than good,” she argued.
 
Government intervention
 
Along with outlining the 13 varieties of late payment, the report includes a set of objectives for government intervention in the trade credit market designed to deal with the negative aspects of late payment without compromising economic growth:

• To dampen the systemic impact of late payment on the economy, by encouraging ‘deep pockets’ (e.g. financial services firms or tax authorities) with a stake in the entire supply chain.

• To ensure that the legal and policy frameworks around incorporation, financing, contracts and insolvency and are aligned in order to deal with different aspects of late payment promptly and in a consistent manner.

• To encourage trade credit by giving suppliers a minimum level of protection against supplier dilution – i.e. the reassurance that even when customers fail they can still look forward to a minimum level of recoveries.

• To ensure that businesses can look forward to a similar level of discretion in negotiating credit terms with their customers regardless of whether they are new or repeat suppliers.

• To encourage the development of financial markets so that businesses have quick access to alternative financing options in response to changing terms of credit or unexpected late payment.

The full report (PDF) can be downloaded here. This report is the first of a trilogy to be published by ACCA on the issue of late payment.
 
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