Competitiveness when SMEs are lenders

Large companies generally have broader and cheaper financing options than small suppliers. Yet when a smaller business must borrow because a stronger customer has not settled its invoices on time, it must finance money already owed to it. The financing requirement migrates towards the participant likely to face the higher cost of capital.

This need not imply misconduct. Commercial credit is ordinary business. Suppliers allow customers time to pay, enabling companies to align purchases with cash flows. There is, however, a difference between credit willingly extended on agreed terms and payments routinely stretching beyond them, as some SMEs experience.

The latter is hardly unfamiliar. What is less clear is its scale. Despite extensive attention to SME financing, trade credit and delayed settlement have not been adequately quantified or studied.

Considerable attention is given to whether SMEs can obtain enough credit. The Central Bank surveys credit supply and demand. Governments establish concessionary financing programs. Parliamentarians consistently address their grievances. Banks provide overdrafts, loans, invoice discounting and supplier financing.

Far less attention is paid to how much credit businesses already provide each other. When a supplier delivers goods and accepts payment later, credit has effectively been extended. It sits on the supplier's balance sheet as a receivable and on the customer's as a payable.

How long does the typical small business wait to be paid? How frequently do agreed 30-day terms become 60 or 90 days? How much SME borrowing is required because revenue already earned has not become cash?

A business awaiting payment must finance the interval. It can use cash, borrow, inject owner capital or delay payment to somebody else. In the last case, the financing burden travels down the supply chain, with consequences for entrepreneurship.

A market may have no formal barrier preventing a smaller company from competing for a large customer. But if doing so requires financing 60 or 90 days of receivables, the payment cycle itself becomes an undeclared capital requirement for entering the market.

Is anyone considering the corporate governance dimension? Extending payables can improve a company's cash position and working-capital metrics. Yet what appears as efficiency on one balance sheet may represent financing pressure on another. The financially stronger company can improve its liquidity by drawing, in effect, on weaker suppliers' balance sheets.

Capital should generally be raised by those able to obtain it most efficiently. Pushing financing requirements towards smaller businesses with higher borrowing costs does the reverse. Those costs can appear in prices, reduced investment, thinner margins or diminished capacity to expand.

Regulation should hardly be necessary where decency, fairness and professionalism are supposed to be attributes of good corporate governance.

The scale of the problem, however, should be measured. Average payment periods by sector, duration of SME receivables and their relationship with working-capital borrowing would provide a better picture of business finance. Listed companies could also provide greater visibility into supplier-payment practices.

Our national SME financing debate has concentrated on how much banks lend, at what interest rate and against what collateral. It has paid much less attention to money SMEs, as the backbone of the economy, have already earned but have yet to receive. We appear devoted to increasing the supply of working capital without examining what slows its circulation.

Sometimes the problem is not that another rupee needs to be lent. It is that the one already owed needs to move.