Background
Small and medium-sized businesses (SMEs) are the backbone of India’s economy, creating a large amount of jobs and spurring economic expansion. Delay in payments is one of the main issues MSMEs in India deal with, though.
Delayed payments put SMEs at a disadvantage compared to large size counterparts, inhibiting their ability to compete effectively in the market, and addressing the issue requires a multi-faceted approach involving various stakeholders. The financial security and long-term viability of these firms are both impacted by the wide-ranging effects of this problem.
Causes of late payments to pharmaceutical MSMEs
Large enterprises’ ineffective cash flow management, such as slow receivables processing and protracted payment cycles, can negatively affect SMEs by delaying their critical payments. Compared to larger enterprises, pharmaceutical MSMEs typically operate in a weaker bargaining position. Buyers can take advantage of this power disparity by delaying payments without suffering severe consequences. Pharma MSMEs might not have the negotiation leverage or other options necessary to properly handle late payments.
Due to administrative inefficiencies, bureaucracy, the ongoing push for improved margins, or a lack of awareness regarding the impact of delayed payments on pharma MSMEs, many purchasers, both private and public bodies, are compelled to employ delayed payment practices.
Challenges posed by payments that are late for pharma MSMEs
For pharma MSMEs, late payments present formidable obstacles. It interferes with SMEs’ cash flow, making it difficult for them to pay personnel, cover operational costs, and engage in growth projects. Some pharmaceutical MSMEs may even be forced to the verge of closure by this financial pressure. Pharma MSMEs may use pricey alternative financing alternatives as a last resort to close the gap left by delayed payments. This has a detrimental influence on their financial health further by increasing interest costs and debt loads.
Delays in payments limit the industry’s capacity to expand operations, make investments in new technologies, or explore new markets due to limited working cash. This limits their ability to grow and stifles the creation of jobs. SMEs are also at a disadvantage when compared to their larger counterparts due to delayed payments, which limits their capacity for effective market competition.
Taking care of the situation
Payment delays to pharma micro, small, and medium-sized companies (MSMEs) call for a multifaceted strategy including numerous stakeholders. The solution to the issue of delayed payments is collaboration. It is important to encourage pharma MSMEs to join trade organizations so that they can have a stronger collective bargaining position and a unified voice when negotiating improved payment conditions with clients.
These 6 tactics can be put into practice to improve the climate for MSMEs and address the problem of late payments to pharma MSMEs in India.
- Government initiatives are crucial for fostering change. To ensure prompt payments to MSMEs, strict implementation of current legislation is required, such as the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006. To discourage the use of delayed payment procedures, penalties for non-compliance should be implemented.
- To enable purchasers to deduct income taxes only for payments made to MSME suppliers, the Union Budget 2023 amended Section 43B of the Income Tax Act. In essence, business organizations cannot consider the expense deductible until the MSME seller has been paid in full. With this approach, the ongoing problem of late payments to pharma MSMEs is addressed, and they are provided with the necessary financial support.
- Promoting the use of electronic invoicing and digital payment systems can speed up the payment process and minimize paperwork. Standardizing payment terms and procedures also ensures clarity and uniformity across industries, promoting smoother transactions and on-time payments.
- To swiftly settle payment problems, effective dispute resolution methods are required. Setting up specialized arbitration centers or online platforms can provide pharma MSMEs with accessible and affordable ways to seek a settlement and reclaim their dues.
- Promoting accountability and knowledge is also essential for altering habits and mindsets. Campaigns should be run to inform both consumers and MSMEs about the consequences of late payments. In order to increase accountability and promote compliance, it is important to emphasize the legal requirements and sanctions for late payments. It may be possible to detect repeat offenders and promote openness by developing reporting platforms or methods that allow MSMEs to anonymously report instances of payment delays.
- The financing of business transactions at Trade Receivables e-discounting system (TReDS) platforms should be encouraged by the government to increase timely liquidity in the hands of pharmaceutical MSMEs. All parties involved in TReDS financing transactions, including MSME suppliers, buyers who are both private and public, and banks and financial institutions, should get these incentives.
