RIABU's pledge2play backs debt-ridden SMEs in payments showdown with big firms

Most SMEs are cash-strapped before COVID-19 and loans are seen as an expensive option.

For social fintech platform RIABU, the rules of engagement should change.

That is, big firms who are clients of small and medium-sized enterprises (SMEs) should start paying the smaller firms on time, especially as these companies are now in even more dire straits as a result of the circuit breaker measures. Data from Experian revealed that many of them were already in debt even before the circuit breaker measures made it worse, with 61% of SMEs already posed high-credit risks by end-2019.

This is despite the fact that SMEs make up for more than make up for more than half (55%) of Singapore’s GDP.

The main reason: 50% of large firms delay their payments to SMEs by an average of 21 days or more after the deadline. Whilst SMEs provide an average payment term of 29 days to their clients, big companies instead pay them 50 days after a deal is made.

To address this issue, RIABU has launched the pledge2pay initiative, where they call upon larger companies to pay what they owe SMEs on time and prevent them from going bankrupt. 

RIABU is a platform that allows SMEs to compare how long firms in the same business usually get paid. Users may take a quiz and the answers come with suggestions on what they need to improve in order to get paid more quickly. This is a cheaper alternative as not all SMEs can afford consultancy services

RIABU’s services under the initiative are free-of-charge until end-2020.

“The problem is at the end of the day, however many tools and templates and however much advice we give these companies, if big companies decide to use their clout, their weight, their market share, to pay small companies more slowly, just because they can. You have a situation of terrible unfairness, which risks bringing lots of companies to their knees, and putting a lot of people out of work,” Simon Littlewood, director of RIABU, told Singapore Business Review.

Currently, Littlewood stated that 90% of all registered entities in Singapore are SMEs, which make up about two-thirds of the workforce. Compared to major firms, they lack the scale to leverage strong relationships with banks and lenders, as well as the scale to compel bigger companies to treat them.

He also added that since the beginning of 2020, payments to SMEs have slowed down, which leaves them prone to going out of business. “It was very interesting that when the crisis started, friends of mine started phoning me up and coming to me saying ‘what could I do?’. A lot of them are saying ‘Should I go bankrupt? We're going to be better just to go bankrupt because I'm going to lose everything otherwise’," Littlewood said.

A lot of SMEs have already borrowed money, with around 40% to 60% of those who apply turned down. “It’s because they're not big enough. The financial data that they have is not sufficiently organised as an SME doesn't employ a big accounting department, so they don't have very sophisticated ways of keeping track,” Littlewood revealed.

Big companies, he further explained, can leverage their balance sheets and can borrow money at low interest rates. And as such options are not open to SMEs; 70% of them who have borrowed money from banks or other institutions have secured that loan with their principal residence at stake.

And even though it’s a government policy in Singapore that persuades banks to lend SMEs money, interest rates on loans in the Lion City are not cheap as they vary between 8-14% or higher, says Littlewood.

“They simply don't have access to the same level of borrowing the bigger companies have, and even if they did, it's not clear that when you're in real trouble. You want to borrow more money from a bank because banks expect to be paid back and they charge you interest. A much simpler solution is to pay [SMEs] when they're supposed to be paid, instead of later,” he added.

Further, he shared that there’s been a gap between paying big companies and SMEs. Larger firms are being paid in shorter time frames and get more funds, whilst smaller organisations see the opposite and become more cash-strapped.

“Those two factors are closely related, it means that the big companies are using their strength to put pressure on the smaller companies to accept longer payment terms. The problem with that is it's unsustainable. You get to a point where the small companies can't survive anymore. Big companies have shareholders, accountants, and analysts who value stocks and pay very close attention to cash flow. So if you pay your suppliers very slowly, and you manage your cash very carefully, your share price goes up,” Littlewood explained.

So far, RIABU’s pledge2pay has received support from various associations and firms, including the Singapore International Chamber of Commerce, the Association of Small and Medium-sized Enterprises (ASME) and Prudential. They are enticing large companies, especially government-related firms, to sign up and to commit in paying what they owe SMEs within 30 days and to commit in doing so until October to November.

“Initially, we decided to keep it going until the end of October. But really, it's a question of how long the economic impact of COVID-19 is going to last because a lot of people thought at the beginning of the year that it would come and go very quickly. Everyone in the US and in Asia, now thinks that the impacts of COVID-19 will continue all the way through this year and possibly into the beginning of next year. So as long as it continues It's important that we support our SMEs,” he said.