Payment Collection: The Bane of Small Businesses


Half of all SMEs project stagnant turnover growth according to the results of the SME Development Survey 2015, published in Nov 2015. The survey identified three main concerns faced by SMEs; Difficulty in hiring staff, high manpower costs, and increasing competition. The report goes on to give an excellent view of the SME landscape, showing for instance that manpower cost was the biggest cost driver, and that boosting productivity was the top strategy that was being employed to manage rising costs.

Business Concerns SME Devt Survey 2015Source: SME Development Survey 2015 by DP Information Network

Yet, while the report is useful to get a flavour of the concerns held by some SMEs, there are several other concerns that often go unheard. Lesser-known roadblocks faced by small business owners are equally or possibly even more crippling than the challenges identified in the survey. A deeper look into the surveyed sample also reveals that 90% of the respondents have been in business for more than 10 years, and only 1% of the sample had been operating for less than 3 years. Speaking to SMEs of various sizes and years of operation, a key theme that surfaced was payment and fee collection.

For many small businesses, securing a deal and delivering on the goods and/or services is only half the battle won. Despite delivering their goods/services on time and in good order, many SMEs face fee collection woes with their clients. Some business owners find their clients paying up long past their agreed deadlines, or not at all, and handling these customers is tricky business. In fact, the biggest culprit for late payments to SMEs could be other SMEs.

“Especially other SMEs, when cash flow is tight, they withhold payment “, says Gary Guwe, a local business owner who has been in operation for 8 years. He adds, “But even larger companies may try their luck and play the power card to either depress fees and costs, or transfer these costs to SMEs. Fortunately, errant companies like these are in the minority.”

Many might believe that legal action is the natural next step in the event of delinquent clients. After all, what use is a contract if we can’t use it as ammunition for when someone doesn’t pay up? In reality, business is hardly ever that simple. For one, legal action against your own client would sour the relationship, possibly beyond repair, putting future business in jeopardy. This is why small businesses may hesitate to take legal action against their clients.

Another business owner who declined to be named recounted her experience getting a delinquent client to return goods that had been delivered but not paid for, despite giving generous credit terms and payment timelines. “The client refused to pay up and even dared me to file a lawsuit, knowing that it would be too costly and time consuming for me”. She had to engage a lawyer in order to get legal redress because the value of the goods exceeded $10,000, the maximum claim value that the Small Claims Tribunal would take on. Going to the Small Claims Tribunal does not require the claimant to hire a lawyer, and would only require a small lodgement fee. Even after the court orders the debtor to pay up, the debtor may not pay up, and subsequent proceedings have to take place for enforcement. The whole process could take months or even years.

Cost of Filing Claims Small Claims TribunalSource: State Courts Website

Timely and reliable payments are particularly critical for the survival of small businesses. While medium or large companies can draw on their cash reserves, or simply take up a business loan from a bank, smaller businesses seldom have spare cash, and their owners usually have to pile in their personal funds just to keep the business afloat in the early stages. Banks seldom give unsecured loans to small businesses with no track record or credit history, and even business loans can be too costly for small businesses (source: Northshore Advisory). As a result, small businesses and startups may find themselves closing down even if they are able to secure sales just because they can’t be paid on time to meet their own bills.

It is troubling that in business friendly Singapore, small companies cannot find readily accessible means of getting redress for something as simple as payment. While consumers have bodies such as CASE which led to the creation of the Consumer Protection (Fair Trading) Act, and big businesses have legal or collection teams that can chase down delinquent debtors, small businesses have nowhere to go to get affordable and timely help for their debtor woes. The World’s Longest Invoice, a page for small businesses who are owed money by delinquent clients in the US, totalled at over US$15 million in just one week. Unfortunately, that money is unlikely to ever be paid.

World's Longest InvoiceThe World’s Longest Invoice – Screenshot

There are a two possible solutions. First, delinquent clients should themselves be marked so that potential sellers and service providers can set more stringent credit terms or request payment upfront. Just as the Credit Bureau Singapore allows lenders to assess a borrower’s credit history prior to issuing a loan, businesses should have access to a rating system to show payment timeliness history of their potential client, particularly for big projects where the service provider would have to invest considerable time and resources, as well as forgo competing projects and priorities.

Next, the legal system has to more easily accommodate the unique debt collection challenges of small and medium businesses. It should be easier to file a claim greater than $10,000 against a delinquent client, and legally enforce that claim in a timely fashion. With sufficient evidence, claims should be processed timely enough for small businesses to be able to meet their own payment obligations. If the small business is forced to borrow while the process is taking place to meet their own payment obligations, the debtor should bear the cost of the credit.

What are your thoughts and experiences on delinquent clients and the solutions proposed? Share them in the comments below!

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