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The Challenges of Not Having Prompt Payment Solutions for SMEs

By Edmundo Montaño - Drip Capital México
Director General

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By Edmundo Montaño | Director General - Thu, 05/25/2023 - 16:00

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Prompt payment is crucial for the survival of businesses of all sizes, especially for small ones. However, medium and large companies often struggle to provide their suppliers with quick and reliable payment solutions, which can have a ripple effect throughout the entire supply chain.

The lack of prompt payment solutions not only affects suppliers by reducing their working capital but also impacts the ability of medium and large companies to maintain healthy relationships with their suppliers.

But what are the main challenges faced by medium and large companies in providing prompt payment solutions to their suppliers, and what are the advantages of factoring as a solution?

Medium and large companies often have to deal with a large number of suppliers and managing payments to them can be a daunting task. Additionally, most large companies have strict financial protocols and may require multiple levels of approval before realizing payments, which can result in delays.

As a result, suppliers often must wait longer than they would like to receive their payments, which can impact their ability to operate effectively. For suppliers with tight margins, delayed payments can result in cash flow problems that can be challenging to overcome.

Delayed payments can also impact the relationship between the company and its suppliers. The suppliers may become frustrated and choose to stop doing business with a company that consistently puts them in this negative situation. This, in turn, can lead to supply chain disruptions and even impact the quality of goods and services provided by the company.

On the other hand, medium and large companies may not have enough capital to make immediate payments to their suppliers, even if they want to. They may have to use their capital for other purposes, such as investing in new products, research and development, or expanding their business. In other words, companies may not have the facility to use their capital to pay suppliers promptly.

Juana Ramírez, President of the Board of Directors of the Association of Entrepreneurs of Mexico (ASEM) indicated that 37% of Mexican companies have access to financing, which is why most are financed with their own resources. This highlights the importance of granting certainty of payment to micro and small-sized companies.

Because of this, the government has provided the Pronto Pago (Prompt Payments) Initiative to incentivize companies to pay their small and medium-sized enterprises (SMEs) within 45 days instead of the 90 or 120 days that are common.

In the United Kingdom, the Small Business Commissioner and the Prompt Payment Code initiative was established to support small businesses and help them resolve payment disputes with large companies. 

Those who subscribe to this initiative are obliged to pay their suppliers on time within the agreed terms and give clear guidance on the terms, problem solving, and late payment notifications. In addition to maintaining good practices throughout the supply chain.

While some companies have expressed concerns about the initiative affecting their profits, others believe that it would not have a significant impact on their operations. This initiative could potentially have a positive impact on the country's economy by improving the liquidity of SMEs that stand to benefit the most from faster payments from their customers.

Factoring is an option that can help companies provide prompt payment solutions to their suppliers. This is a financial transaction in which a company sells its invoices to a third party, known as a factor, at a discount. The company receives immediate cash for the invoices that can be used to pay its suppliers.

This type of financing provides several advantages for both the company and its suppliers. Firstly, it allows the company to provide prompt payment solutions to its suppliers and maintain healthy relationships with them. Secondly, factoring can improve the company’s cash flow position by allowing it to access cash quickly, which can be used to invest in its business. This, in turn, can lead to growth opportunities for the company.

For suppliers, factoring can provide a steady stream of income by allowing them to receive prompt payments from the factor. This can help them manage their working capital efficiently and invest in their own businesses. Additionally, factoring can help to reduce the risk of non-payments, as the factor sometimes takes the responsibility of collecting payments from the company’s clients.

Factoring is available in several types, such as recourse factoring and non-recourse factoring. Recourse factoring requires the company to remain responsible for payments if customers fail to pay. Non-recourse factoring, on the other hand, transfers the risk of non-payment to the factor, freeing the company of payment obligations if customers do not pay. Companies can select the factoring type that suits their needs.

It is essential to understand that factoring is not ideal for all businesses. Those without a stable invoice stream or those whose customers pose a high non-payment risk may not benefit from factoring. Furthermore, factoring comes with a cost that can impact the company's profitability.

To implement factoring effectively, businesses should assess their payment processes and weigh the pros and cons of factoring. They should also select a dependable and respected factor and negotiate favorable terms for the factoring agreement.

Photo by:   Edmundo Montaño

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