In Kenya, micro, small, and medium enterprises (MSMEs) are the backbone of the economy, contributing significantly to employment and GDP. However, a pervasive issue threatens their survival: late payments. This practice, where large businesses and government entities delay payments to suppliers, has created a cash flow crisis, pushing many SMEs to the brink of collapse.
Extended Payment Terms: A Growing Concern
Traditionally, businesses operate on agreed payment terms, often ranging from 30 to 60 days post-delivery. However, a study by the State Department for Trade revealed that retailers in Kenya are taking, on average, between five to seven months to pay their suppliers. This significant deviation from agreed terms has turned retailers into interest-free credit consumers at the expense of SMEs.
Impact on SMEs
The repercussions of these delayed payments are severe. For instance, Tharaka Honey Limited, a once-thriving enterprise, ceased operations in March 2017 due to overwhelming unpaid invoices. The company’s closure underscores a broader trend where SMEs face high-interest charges on borrowed funds, loss of goodwill with their own suppliers, employee attrition due to delayed salaries, and the constant threat of asset auctions.
Government’s Role in the Crisis
The public sector is not exempt from this issue. Plenser Limited, an engineering firm, reported that it had not received payment from the Nairobi County government for an incinerator installed at Mbagathi Hospital in 2015. Such delays, spanning years, exacerbate the financial strain on SMEs, especially when coupled with bureaucratic hurdles in the payment process.
A Call for Prompt Payment Practices
The late payment culture in Kenya stifles the growth and sustainability of SMEs. Addressing this issue requires a concerted effort from both the private and public sectors to honor payment agreements promptly. Implementing stricter regulations and fostering a culture of timely payments can rejuvenate the SME sector, ensuring these businesses continue to contribute to Kenya’s economic development.
Source: Business Daily