Impact Of Delayed Payments On MSME

In India, Micro, Small, and Medium Enterprises (MSMEs) act as the backbone, as they contribute especially to employment, innovation, and GDP growth. The biggest challenge these businesses face is delayed payments from clients. The impact of the delayed payments on MSMEs can affect cash flow, operations, and the growth of the economy. This article will explore the multiple impact of delayed payments on MSME sector.

What Is Delayed Payment in MSMEs?

A delayed payment is a situation that occurs when clients or buyers do not pay MSMEs during the time agreed upon for credit. In most cases, MSMEs operate with low cash flow and must depend on payments to pay for expenses. When a delayed payment occurs, this negatively affects the business’s financial flow as a whole.

Major Impact of Delayed Payments on MSME

The impacts of late payments on MSMEs are multifaceted and affect many factors of business. 

• Create a hindrance in Cash flow:  MSMEs often work with limited levels of funds. When payments are late, working capital is also delayed, so making timely payments to suppliers, employees, and operational costs is going to be burdensome.
• Slower business growth:  Because revenues are delayed, MSMEs cannot make timely investments into expansion, marketing, or research and development – again, slowing their growth. 
• Increased borrowing: To keep up with short-term debt obligations, various forms of lending will be sought, regardless of the high interest and further financial burden, as this will be the only source of business cash flow remaining. 
• Disruption of supply chain: The effects of a late payment on working capital can ripple through on-time payments to suppliers, potentially affecting their operations and relationships, but also product quality and supply chain disruptions as good partnerships become challenged by late payments.
• Decreased employee morale: An MSME’s business financial condition will affect its cash flow to labor, meaning delayed salaries and decreased employee benefits, which will impact motivation and productivity, and create absenteeism or retention issues.
• Loss of business opportunities: Problems with a payment cycle will challenge an MSME´s ability to take new orders or clients with potential to increase sales, which is a missed revenue opportunity for someone else willing to take the chance.
• Credit scrutiny: The ongoing effects of delayed payments will directly affect an MSME’s creditworthiness, which will create difficulties with obtaining business loans or financial support from banks, who will subject the MSME’s application to rigorous scrutiny.

What Causes Delayed Payments In MSMEs?

Understanding the causes of delayed payments can help create plans that eliminate the delays. The drivers of late payments may include: 

• Poor cash flow management by clients, companies (especially larger corporations) might be facing cash flow issues or mismanagement of accounts payables which causes delayed payments to MSME vendors. 
• Multiple layers of approval, larger companies have many approval levels. Even when there are funds available to pay their MSME vendors, the various levels will delay payments. 
• Quality or delivery issues, even the best service may take longer to be paid for if there is a dispute alleging poor quality, or a late or delivery issue. 
• Slow economy, when the economy is slow, clients delay pay periods to improve cash flow creating a challenge for the MSME economic strain. 
• No contracts – many MSME vendors operate with a verbal agreement or informal contract which is out of reach of the legal system to enforce timely payment.

Government Measures To Reduce Delayed Payments

To reduce the effects of late payments on Micro, Small, and Medium Enterprises (MSMEs), the government has introduced various schemes, including: 

• The MSME Development Act of 2006, which specifies that a buyer must pay the MSME supplier within 45 days and that the buyer will incur interest in the event payment is not received on time.
• Trade Receivables Discounting System (TReDS): which is a digital online system that enables MSMEs to receive payment for an invoice by discounting the invoice to a financier which diminishes some effects of late payment. 
• Priority sector lending: which are bank loan policies to incentivize banks to lend to MSMEs, to firm up cash flow as a cushion for late payments. 
• Digital payment schemes: including the promotion of digital and online payment systems to conduct and transact in a marketplace, complete a transaction affordably and transparently, and have a reasonable delivery time.

How MSMEs Can Manage Delayed Payments

While government measures help, MSMEs can adopt internal strategies to reduce the negative impact of delayed payments:

• Implement Strong Credit Policies: Set clear payment terms, enforce contracts, and include penalties for late payments in agreements.
• Invoice Promptly and Clearly: Send accurate invoices immediately after product delivery or service completion, with clearly mentioned due dates.
• Use Technology for Payment Tracking: Employ accounting software or ERP systems to track invoices, send reminders, and maintain payment histories.
• Diversify Client Base: Relying on a single client increases risk. MSMEs should diversify their clientele to reduce dependency on delayed payers.
• Negotiate Advance Payments: Request partial advance payments for large orders to ease cash flow pressure.
• Leverage Financial Instruments: Use invoice factoring, TReDS, or short-term loans to bridge cash flow gaps caused by delayed payments.

How Udyamita Helpline Can Save MSMEs From The Impact Of Delayed Payments?

The Udyamita Helpline is intended to help MSMEs to remedy their payment issues measurably and legally. This is what Udyamita Helpline can help MSMEs with in this process:

• Provide specialist information and protect small businesses from late payments under the MSMED Act.
• Assisting MSMEs in using the MSME Samadhaan Portal to file complaints of delayed payments
• Assisting MSMEs in facilitating disputes with the MSE Facilitation Council (MSEFC)
• Assistance in drafting a legally sound demand letter and application for recovery
• Facilitating MSME preparation and review documentation (invoices, purchase orders, etc.)
• Follow-ups to ensure there is progression on the matter in a timely fashion
• Assistance in claiming interests owed for delayed payments
• Cost-effective, efficient, supportive, and strategic transactional legal assistance for businesses

Conclusion

The impact of delayed payments on MSMEs is that it affects their cash flow, growth, vitality, and sustainability. The delayed payments from clients caused many challenges for MSMEs, but solutions exist, including government policy in the form of the MSME Development Act and platforms, such as TReDS. The MSMEs can now adopt a proactive and evergreen approach by establishing strong credit policies, implementing efficient invoicing systems, and accessing financial instruments available to mitigate the risk of delayed payment by their clients.