Late payment kills small businesses – ask anyone who has tried to start their own business.  You risk everything to start up, get the right staff and equipment, win the tender, and do the job to your customer’s satisfaction.  And then you wait for payment … and wait, and wait. While bigger businesses usually have more cash reserves – or can borrow cash while they wait for customers to pay – small businesses do not have that luxury.  They are usually hand-to-mouth operations, and just can’t operate if money doesn’t flow into their bank accounts regularly.  But their customers don’t always care.  And government departments are unfortunately among the worst late payers in town.

Why should this be the case? After all, government always has the money to pay (unlike certain business customers, who may have cash-flow problems of their own).  The answer, it must be assumed, is simply inefficiency.  Their systems and their staff just don’t get the job done as quickly as it could be – and should be. The issue here is not just efficiency. It is also the issue of leading by example.  Government talks a great deal about the importance of small business, black empowerment and transformation, as well as about competitiveness and good business practice.  This should make it doubly responsible to deliver a good, prompt service to small business, rather than crippling them by taking two or three months to pay for goods or services that they’ve already received.

Should we consider a solution to this problem that has been tried and tested in the UK and Europe? They have a law on late payment that allows small businesses to charge interest on accounts that are not paid within 30 days (or earlier, if you want).  In the UK, the Late Payment Act was passed in 1998, giving small businesses the right to add interest (at 8% above the base rate) to their invoices when large business customers did not pay on time.  If there was no due date for payment on the invoice, then the law assumed that the customer needed to pay within 30 days.  However, a small business can specify a shorter or longer payment period when they negotiate the sale in the first place.  Either way, they can use the law to help them get business customers to pay on time.  To make the law more effective, small businesses were encouraged to mention the Act on all their invoices and contracts, so that their business customers are aware that their account will grow if they don’t pay it.

In November 2000, the UK extended the law so that small businesses could use it against other small businesses that owed them money.  In 2002, big business was also given the right to charge interest on overdue accounts.

What do you think? Should we have a late payment law for small businesses in South Africa?

Write to us or go to www.ncf.org.za and click on ‘Consumer Fair’ and ‘Have your say’.

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APRIL 2005