Late payment has always remained a ball and chain to the Indian small and medium enterprise sector's growth. Most SMEs' cash flow can hardly withstand the burden of late payments but still these firms usually extend credit in the form of delayed payment. They can't help but do that. It has become a way of doing business. Saying a "no" means losing a customer for ever.
It's beyond doubt that extending credit to customers is an aid to selling. But by contrast, there is also an inevitable element of risk that one will not be paid on time. In fact, late payments have always continued on a grand scale, with thousands of SMEs hamstrung by them -- every day. And surprisingly, it is the big boys -- the larger companies -- whom most SMEs always try to treasure as customers -- that are the worst offenders.
What can a small firm do to respond to this lingering problem? I think a simple but meaningful action can help a lot: create a smart credit policy for your business. It will not only reduce the risk of bad debts but also help manage your largest asset -- the DEBTORS. While promoting prompt payment and cash flow, a well-defined credit policy can also help prevent your relationship with many of your customers from going sour.
A small firm -- before it ever considers granting credit to a customer -- small or big -- should make sure that it has a credit policy, which clearly states all important credit terms and conditions, including the basics, such as the terms of sales, discount rates and discount periods it is willing to offer, how it calculates interest rates, whether it reports payment behaviors’ to credit reporting agencies and so on. Apart from that, a credit policy should also address
other aspects of a transaction, such as late fines, remedies if a customer fails to pay the debt, venue and jurisdiction for legal action, delivery obligations, maximum time allotted for merchandize inspection, etc. In addition, an effective invoicing system and a bad debt collection policy should be closely tied to the credit policy.
Also, the government can play a significant role here to help the SME sector -- the backbone of our economy -- get rid of the burden of chasing overdue invoices. We should have stricter regulations against such parasitic business practices. Industry associations should also come forward to address this issue.