More than half of the world’s largest economies have some form of legislature to control payment terms large businesses can extend to their suppliers. The majority of these countries have implemented sector-wide regulations, like the EU´s Late Payment Directive that limits payment terms to 60 days, but in at least seventeen countries, laws have been introduced to specifically regulate the agri-food sector.
The ever growing list of countries regulating payment terms on agricultural and food products, highlights the unique set of working capital challenges experienced within the sector. The agri-food sector contends with long production times, relatively inelastic demand, and supply being affected by local weather and international drivers often beyond their control.
Despite its widespread implementation, the effectiveness of payment term legislation has been highly debated. Data has shown that establishing a payment term limit does not necessarily translate to shorter payment times. Late supplier payment continues to persist in many cases. A difference in the negotiating power between large and small businesses can explain for a large part of this. As with most industries, an imbalance of power exists between large buyers and their smaller suppliers. In the agri-food supply chain however this imbalance is more pronounced, with the sector being constituted of a large number of smaller farmers interacting with often larger distributors and retailers.
South Africa has yet to implement specific laws regulating supplier payment terms, but looking at worldwide trends, could South Africa join the growing list of countries limiting supplier payment terms? Could this be a way for the government to unlock the stimulatory effects that paying suppliers on time would unleash on the economy?
At the core of payment term legislation lies the objective of SME growth, job creation and economic diversification. In South Africa, SMEs represent more than 98 percent of businesses, employing between 50 and 60 percent of the country’s workforce across all sectors. 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. In light of this, government regulation of payment terms could go a long way in improving cash flow and working capital for many small businesses, including those in food and agricultural supply chains.
The fact of the matter is that improving working capital for farmers and SMEs in agricultural and food supply chains will have to come from somewhere, and in the majority of cases, that would mean larger retailers. Payment complexities within the agri-food sector means that simply transferring working capital to small suppliers and farmers will likely not materialise.
Many companies within the sector have already implemented alternative financing programs to accelerate payment to their suppliers. Finvex.tech´Supply Chain Finance is one such alternative to ensure small businesses in the agri-food supply chain receive payment almost immediately rather than have to wait 30, 60 or 90 days. While buyers ensure the financial health of their supply chains – preserving their own cash flow – suppliers can access funding at rates far below what they could otherwise achieve alone from banks. It’s the beauty of our programs, everyone wins.
In the current economic climate, this alternative source of finance and cash flow benefit is critical for farmers and SMEs across South Africa. For more than two years, Finvex.tech has helped Castrolanda, one of the largest agribusinesses in Brazil, to ensure that over 2000 of its suppliers can deliver the goods they need, when they need them.
With Finvex.tech, buyers have the flexibility to choose how to finance their suppliers’ working capital needs. Third-party funded programs provide suppliers access to affordable financing by leveraging the typically superior credit rating of the buyer, while self-funded programmes use the buyer’s own cash to offer early payment in return for discounts on the invoice value. The discount is generally related to an agreed interest rate and the number of days early that the supplier accepts payment. The reduced purchasing cost is effectively a risk-free return earned on the buyer’s cash.
No matter how the program is funded, our digitised end-to-end solution makes offering early payments easy. Our proprietary technology allows for the seamless data communication between buyers´ ERP system and our cloud-based platform. Save time and paperwork from one-off early payment agreements with high-value suppliers. With Finvex.tech, no supplier is too small to be part of the program. We digitally onboard, service and support all levels of suppliers. Suppliers can opt in with just a few clicks and accept early payments for all subsequent invoices through our web-based platform or mobile app.
Contact us to learn more about how our alternative finance solution can get your suppliers invoices paid immediately without negatively impacting your own cash flow.