The ´Pay-in-30´ initiative
In an effort to ensure South African SMEs survive the economic crisis brought about by the COVID-19 pandemic, more than 50 large companies have formally committed to paying their SME suppliers in 30 days. The initiative, called “Pay In 30”, is spearheaded by Business for South Africa (B4SA), the SA SME Fund, and Business Leadership South Africa (BLSA).
The pandemic has had a devastating impact on 2.5 million SMEs accounting for 10.8 million jobs in South Africa. Transunion data points to 6.4% of formal SMEs going into bankruptcy (up 50% from the previous year), with 260 000 jobs lost and another 240 000 at risk.
A culture of late SME payments
Even before the crisis, South Africa SMEs cited working capital and cash flow as the main threat to their growth aspirations. Xero Accounting’s survey in December 2019 found that 91% of SMEs are owed money outside of their payment terms, and 47% cite cash flow issues and late payments as two of the main obstacles to their growth. As such, more than 20% struggled to pay their staff and suppliers and were denied access to finance because of poor cash flow.
Should government and corporates meet the promise to pay suppliers within 30 days, it will be a game charger for a sector accustomed to payment delays of 90 days, 120 days, or in some cases even longer. But how are they going to achieve this? There is a glaring lack of detail around exactly how these businesses have changed their internal processes to allow for 30-day payments to happen.
Cash is king for small and large businesses alike
At the end of the day, ´cash is king´- no matter the size of the business! In the face of rapidly changing business models and digital disruption, cash and working capital management strategies have become increasingly important to ensure the financial health of companies- and yes, that includes corporates.
Whether to wade economic turbulence or fund digital transformation, mergers and acquisitions, or research and development, corporates are finding themselves in ever greater need of cash. Maintaining good cash flow is just as important for corporates and it is SMEs.
Cash tied up in sales on credit or inventory will increase the working capital requirements of a business. By similar logic, quicker collections of receivables and slower payment of suppliers will reduce working capital needs, and free up more cash. Indeed, in many corporate finance departments, having good cash flow is given priority over the health of their small suppliers. It’s not part of their finance team’s key performance indicators to ensure that suppliers are paid timeously.
A CEO coming out publicly against late payment is not the same as an accounting department issuing payments in 30 days or less. There’s clearly a need to address how corporate South Africa is going to achieve 30-day payments given their own cash flow requirements.
Finvex unlocks working capital for corporates and their suppliers
Finvex helps to ´neutralise´ the impact of long payment terms, by helping suppliers access cash at favourable rates – while at the same time allowing the buying organisation to optimise its own cash position. A funder on our platform can buy a supplier’s invoice, confident it will be paid on the previously agreed payment terms by the large corporate buyer. The funder, therefore, has a lower risk than if it were to advance a loan to the supplier and expect to be repaid by the supplier. So now, with Finvex, it can make funding available to the supplier at a lower cost than the supplier could get from its own bank.
The corporate creates real value across the supply chain by leveraging its credit profile as a means to finance their suppliers. By giving suppliers access to affordable funding, their costs reduce, and if their costs reduce the buyer´s pricing should come down. Cost savings means higher profit margins and improved capital efficiency. And best of all, the corporate buyer doesn’t have to sacrifice its own cash flow to pay suppliers within 30 days. It’s the beauty of our programs- everyone wins.
Contact us to learn more how we can help you optimize your own working capital while ensuring your suppliers are paid immediately.