The late payment of trade credit : an analysis of its effects and causes in the local commercial environment

Abstract

Purpose: The granting of trade credit by non-financial firms to their business customers is a widespread practice, and has for long been an entrenched part of Maltese trading culture. The late payment of the resulting trade debt is however widely recognised as a routine problem, afflicting pain on many SMEs. Against this background, the purpose of this study is to determine the extent of the late payment problem in local business-to-business trade, the major effects that it is having on local SMEs and to obtain an understanding of the main factors causing payment delays. Design: To satisfy these objectives, a questionnaire was sent to a random sample of 1200 Maltese businesses in their capacity as providers of trade credit. The survey yielded 278 valid responses, representing a response rate of 23%. Findings: The study reveals that late payments constitute a prevalent problem in local business-to-business trade, with half of business customers reportedly paying late habitually and taking an average of 124 days to settle their supplier's invoices. The major effect of this is that SMEs are ending up sacrificing their already limited administrative resources to collect overdue payments from their customers rather than focusing on more important areas of their business operations. Furthermore, the study shows that payment delays are the result of a number of factors working simultaneously. iii Conclusion: the study concludes by recognising that prompt action is required to slow down this vicious circle of payment delays. If such action is not forthcoming, late payments will continue to restrict the development of local SMEs, to the detriment of our own country's economic growth. Value: it is therefore hoped that the suggestions given will contribute towards lessening the extent of late payments in local business-to-business trade. This will in turn significantly improve SMEs access to cash, and therefore put them in a better position to grow and develop to their full potential.