Hit hard by late payments that further exhaust their already-stretched cash flow, Indian small and medium enterprises (SMEs) have urged the government to draw up a plan of action in order to ensure that all invoices are paid to them promptly, particularly by large companies -- the "big boys" -- whom they view as the worst offenders.

Based on feedback from readers on a recent editorial on the issue, SME Times has found a large number of small firms claiming that they have been affected by late payments. They urge the government to introduce some tougher regulations to tighten the noose on large firms, which usually have more clout to engage in such unfair business practice than small ones do.

"This is very common with big companies. They use supplier money for their working capitals. A very few companies can say that they pay SMEs or SSIs within 45 days. Most common excuse is that they did not receive the bills, which by contrast is always send with delivery of goods; nobody can send goods without bill in transport," says Anil, a respondent.

"We need a full-power regulator," he adds.  

According to K. Deshpande, another respondent,  industry associations and similar bodies need to play a proactive part in curbing this "malady".  

"This is a malady, which is causing huge losses and several SMEs are reeling under the burden of late payments. The delays are usually attributed to long and complicated bill passing procedures, thereafter, there is the cheque preparation procedure, the cheque signing procedure and finally the cheque handing-over procedure. In all these, it takes a few weeks to even months to finally receive the payment," he points out.

Recovering interest is another big obstacle, he adds.

"The vendors tend to waive off the same in the interest of keeping their clients happy and maintaining long-term relations, and the clients do not fail to take undue advantage," he mentions.

According to some readers, small firms are more honest while it comes to payment. "Yes, SMEs are more honest in this case," opines one of them.

However, Amol Kumar Sail has a slightly different view. According to him, it is not only the larger firms but also some SMEs who play this old trick of paying late.

"Now, not only big concerns are a matter of concern for late payments but also the fellow sheep from our own herd default on payments and sometimes totally cheat, and the SME on other end of the transaction can't do much about it, but wait and send reminders," he says.

"Maybe a separate prosecution court is needed for such issues," he suggests, adding that the industrial policy department can play a very crucial role in this and by all means it should give attention to this issue and further strengthen the existing laws or enactments.

At present, there are two acts: the Delayed Payments Act, 1998,  and the Micro,Small and Medium Enterprises Development (MSMED) Act 2006 that seek to address delays in settlement of payment of bills by the large-scale buyers to the MSME units.

But experts view that these acts are not enough to curb this menace.

A number of respondents told SME Times that establishing a credit policy is extremely important for small businesses.

"We have introduced a credit policy and now most of our outstanding invoice are paid within 30 days or we put them on Stop Credit; if this does not work we do not give them credit in the future and make pay on delivery." says Michael Herrett.

"This is the only way," he emphasizes.

However, according to A.V. Sundararajan, it is tough to make the large firms sign on a legal document. "If a vendor asks the customer to sign on a legal document, he is out of the race. By contrast the vendor has to sign Non Disclosure Agreement," he points out.

On the other hand, some firms simply emphasize on broadening the customer base. "The solution consists only in broad-basing the customer-list wide enough instead of depending for business only on a limited few who are only out to constantly exploit them," says S.R. Rama Subbaiah.

Factoring is a good solution, opines another respondent. "Although there is a cost involved, a large business is less likely to default on payment terms with the "factor" who is usually a large bank," Andrew T Gale adds.

Also some other innovative ways have been suggested to prevent the story of late payment repeating time and again -- up and down the country among India's millions of small and medium enterprises.

According to Anil Bhargavaa, transactions should be through a "credit card type system" with in-built credit-period among the parties and where the credit-period is not mentioned. It should be fixed, say, for example, 45 days by default. Bankers can be roped in to give a collective system of operation of settling the payment and the credit period," he opines.

Another respondent Vijay Jassal views that it will help if the issue is taken up by a larger SME forum with "big boys" who should be persuaded to act as "elder brothers".

In a similar tone, V. Murali says that it is required to set up an SME certificate-issuing body that has power to closely monitor companies, conduct audit at frequent intervals, and issue NOCs.

Similarly, N Maheshwari recommended to set up a credit-rating body by a forum or a third party to voice the concerns of the SME sector. "A Web site should be maintained and updated by vendors about the credit history of companies giving relevant references to maximize flawless information," Maheshwari says.

While late payments have remained a cause of big problem for Indian SMEs, it seems that small firms in some other parts of the world are not less concerned about this unfair business practice.

And, as cited by another respondent, the scenario is not different in the UK.

"Here in the UK, we are facing the same problem. According to recently-published figures from Bacs, 861,000 small business firms are facing this problem. They are forced to wait 28 days more than the specified terms to get their payments," says J. Akins.

Another respondent terms late payment as an "international endemic" and calls for an international initiative within the context of world trade organizations in order to install a legal code of conduct in this matter.

"But the issues invites a big question," I. Ascher from Israel says, adding, "What if a country itself encourages this plague because it is the first body not to respect payment deadlines?"

(Writuparna Kakati can be reached at rituparna@tradeindia.com)