Understanding the problem of delayed payments – the small business perspective
Updated: May 24, 2019
While almost all businesses face the challenges of delayed payments; for small businesses the problem is made worse by their financial constraints. In this context, it is helpful to understand the various legal avenues available to small businesses in case their payments are long delayed. Government Definition of MSMEs for MSMEs (micro, small & medium businesses) to benefit from the policies of the government, a business should be eligible as an MSME as per definition of MSMEs and duly registered with relevant authorities.
However, it should be noted that the above definition is due for change, and the relevant bill is pending passage in Parliament. The new definition, once passed in law, will be as follows:
To read an analysis by our Co-founder on the proposed new MSME definition,
Why is the problem of delayed payments worse for MSMEs?
Since MSMEs have lesser fixed assets and sources of funds, they depend acutely on cash flow from customers —large corporate entities in particular, to run their day-to-day operations. But data has shown that large corporate buyers tend to greatly delay payments to their MSME suppliers. MSMEs have s much higher days sales outstanding (DSO) than large corporate entities in India. This means that MSMEs have to wait for a much higher number of days than large corporate entities to receive payments from their customers. As per research by one of our co-founders, sample data from 2016 reveals that micro businesses received their payments in 79 days, compared with large companies that received payments in 56 days. In manufacturing, micro businesses received their payments more than 30 days later compared to large corporate entities.
To read the entire research article click here:
Essentially, small businesses received their payments late, and this in turn adversely impacts their working capital and overall profitability.
What can MSMEs do if their payments are much delayed?
The Government has policies in place to protect the interest of small businesses (MSMEs as defined earlier). Specifically, the Micro, Small and Medium Enterprises Development (MSMED), Act 2006 covers provisions for cases of delayed payments for MSMEs. The essence of these provisions (applicable for micro and small enterprises) is as below:
Payment Terms: If any micro or small enterprise that has relevant MSME registration supplies any goods or services, then the buyer is required to make payment on or before the date agreed upon between the parties. In case there is no specifically agreed payment term, then the buyer is required to make payment within fifteen days of acceptance of goods or services. Further, in any case, a payment due to a micro or small enterprise cannot exceed forty-five days from the day of acceptance or the day of deemed acceptance.
Penalties to Buyers for Delayed Payments: If the buyer fails to make payment of the amount to the micro/small seller, the buyer will be liable to pay compound interest with monthly rests to the seller on the amount from the date agreed on for payment, 15 days after the buyer has accepted goods and services, at three times of the Bank Rate notified by Reserve Bank. This applies in the case where the buyer does not make the payment within 45 days from its acceptance of goods/services from the seller.
Requirement to Disclose in Annual Statement: In case a buyer is required to get the annual accounts audited, then it is the responsibility of the buyer to disclose the following facts in the annual statement. The principal amount and interest due thereon remaining unpaid to any micro or small supplier at the end of the accounting year; The amount of interest paid by the buyer and the amount of delayed payments made by the buyer; The amount of delayed payment interest due and payable
Usage of these Provisions by MSMEs: It is common knowledge that most MSMEs prefer to accept delayed payments rather than use legal avenues to file complaints against their buyers. This could be due to their fear of losing the buyer’s business or due to the time and costs involved in usual legal processes. Recognizing these concerns of MSMEs, the Government has developed a portal (MSME Samadhaan – Delayed Payment Monitoring System) that makes it easier for MSMEs to lodge complaints regarding delayed payments.
MSME Samadhaan: It is an initiative by the Government of India where MSMEs can file complaints in cases of delayed payments from buyers and get them resolved online. It aims to help MSMEs get their delayed payment issues resolved in a faster, convenient and reliable manner.
To access MSME Samadhaan, please click here:
MSME Samadhaan is an online portal where MSMEs can register cases of delayed payments when they have not received their dues even after 45 days of acceptance of goods/services by their buyer. Any MSME with a valid Udyog Aadhar (UAM) can register on this portal and fill out an online application form for filing their complaint. The complaint will be investigated by the respective state’s MSEFC (Micro & Small Enterprise Facilitation Council). After filing complaints for delayed payments, MSME owners can view the status of their complaints from the comfort of their own homes through a dashboard displayed on the MSME Samadhaan website.