Why We Started A Change.org Petition Fighting India’s Late Payment Culture

 

(Our petition against India’s late payment culture can be found here)

The Late Payment Problem

We’re going to keep this short. Now that 97% of Indian SMBs were reportedly paid late in 2015, the late payment culture in our business environment has gotten out of hand.

Today, India officially carries the longest average payment delays in the Asia Pacific for B2B SMB invoices, 51% of which are always paid late.

The system currently in place is flawed, and heavily skewed in favor of the largest buyers on the market. The judicial system is over-burdened. It consequently delivers justice far too late to save businesses whose money is trapped in clients’ accounts.

What’s more is that the entire idea of justice by law in business is a debunked protection. Smaller businesses almost never take non-paying clients to court because they fear losing out on future contracts. They would rather suffer through the impact of being paid 90 to 120 days late, while their salaries go unpaid or they miss out on larger opportunities to thrive.

This isn’t guesswork either. Not only has this been verified to us in our hundreds of interactions with Indian CFOs and CEOs, but a commission established to study the impact of the EU directive against late payment found that 60% of European small businesses never even consider a legal battle as an option because they don’t want to spoil working relationships.

And why would hard-working Indian businesses, which prefer compromising to build strong working relationships with clients, be any different?

Our Motivation

As supporters of the business reforms espoused by our esteemed Prime Minister, Shri Narendra Modi, we believe that unorthodox action begets change. And yet, the late payment protections for businesses in India have stagnated in the same state for the last twenty years.

The last committee set up in 2014-15 to study further updates required on the MSMED Act – which provides these legal protections to SMBs – did not even consider the necessity for better options. This was despite the comprehensive database of studies measuring the horrendous effects of late payments on the Indian business environment.

Instead, they directly skipped over the issue of late payment protections, and jumped to the question of “How can we provide more access to loans for these companies?” And all we ask is, why? While access to credit is vital for businesses in any growth economy, late payment is the root of significant troubles in the world. It causes bankruptcy and unemployment, and increases barriers to survival in the business world. It also has a significant impact on inflation since businesses up and down the supply chain mark up prices to survive late payments from their clients.

As a single factor, trade credit is indispensable because it allows companies to keep running operations even during temporary working capital shortfalls. But when it extends to the point where clients refuse to pay their suppliers intentionally, as was the case with 38% of Indian SMBs paid late last year, it needs to be addressed.

A late payment culture which forces sellers and suppliers to simply accept it as an unaddressable pain is the equivalent of a cancerous tumor. It creates chaos, and no one can entirely predict which sections of the body it will hit next if left unchecked.

And this tumor isn’t very difficult to target either. Rather that It’s grown this large from a lack of trying than a lack of successful solutions. While we sit and attempt to convince you of the horrific effects of this problem, the UK government has now passed legislation mandating all large companies to release the details of their payment practices twice a year.

This means that SMBs and startups dealing with larger companies will now be able to check beforehand what the average payment term for their prospective client actually is even before signing them on.

Singlehandedly, this increased visibility has become the best prospective protection against large businesses which exploit their financial influence on their supply chain. Now, with the reputation of their leadership on the line, larger companies have lesser incentive to hoard cash while not paying suppliers.

Even though this may not be immediately possible in India’s current business and political environment, our motivation is to bring about similar unorthodox solutions to protect the average Indian business.

What We Want

What we want is simple – for you to sign the petition, and support us by sharing it among your professional and personal circles. This is no longer a problem which affects business alone, but is also a big contributor to why life in India is getting significantly more expensive year on year.

Next, we want the government to approve another sitting committee which will accept input and feedback from the private sector for meaningful practical solutions rather than laws which look good on paper.

Instead of adding more courts alone, which will be overwhelmed just as soon by India’s burgeoning case burdens, we are pushing for the establishment of a first line of defense. We want for policy to allow for out-of-court protections which can be enforced in straightforward non-payment cases, thus clearing the line in courts for more complicated business disputes.

To this end, as some of the most prolific activists pushing for more awareness of the phenomenon of late payment in India, Hummingbill intends to release a policy white-paper for the Indian government as well in the coming month.

Keep an eye on this space for more updates on this exciting journey. Now that we can depend on your support, click here to read and sign the petition.

But, before you leave, what policy recommendations would you put forth from experience, which could help fight the late payment culture in India? Leave your answers in the comments section below.

change.org

 

 

 

Why Flipkart Taking Clients to Court For Non Payment Is A Big Deal

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What’s The Scoop With Flipkart?

 

“The digital industry is suffering because there have been several cases where advertisers default on payment… We do not have a strong industry body in terms of payment collection yet.” –  Amar Deep Singh, CEO, Interactive Avenues

 

(article originally posted here)

Between April and May 2016, one of India’s e-commerce leaders – Flipkartfiled cases against 20 of its clients for payment, to collect unpaid advertising dues.

 

Unlike Snapdeal and Amazon, who charge their clients ahead of time,Flipkart provided advertising services to clients on credit.

 

Though this move made sense as an advantageous proposition to attract more clients away from competitors, they have now initiated legal procedures against non-paying patrons who respectively owe them anywhere from Rs. 90,000 ($1,350) to Rs.1 crore ($150,000).

 

Is This Non-Payment A Common Problem?

The Indian business culture is infamous for the chaotic state of its payment practices. In fact, India has the longest average payment delays in the Asia Pacific region (Atradius Payment Practice Barometer).

 

Furthermore, 97% of Indian SMBs were paid late by their clients last year.38% of these businesses claimed that the late payment was an intentional move by clients. It was a means of using trade credit to finance their own working capital needs.

 

What’s more is that most of these companies will never enforce their contractual terms on overdue Accounts Receivables. Even when 1 in 2 B2B SMB invoices are paid late. And 1 in 7 B2B invoices are still pending past 90 days.

 

This is because enforcing a contract in court for non-payment by a client can take up to 3 years and 40% of the claim value to resolve (Doing Business India). By the time suppliers manage to get their money from the over-burdened court system, they’re already sinking under.

 

Which means that larger clients and buyers run pretty roughshod all over smaller SMBs in their supply chain. They even threaten to withhold payment altogether if their suppliers don’t give them unreasonable discounts to get paid faster.

 

Large buyers are well aware that their smaller suppliers are:

  • Either not aware of their legal rights in such situations;
  • Won’t act upon their legal rights because they would choose preserving business relationships over getting paid faster;
  • Will be tied up in an expensive legal case for years if they try to take matters to court.

 

This has created an environment where only the most exclusive businesses can demand payments upfront. While others are usually forced to roll the dice on the kind of client they land up with. Or have to face being ignored altogether by prospective customers.

 

To put this in perspective, for all the talk of “Why don’t businesses just demand payments upfront”, 98% of Indian SMBs extended goods and services on credit to their clients in 2015.

 

And if you think the situation is bad for regular Indian SMBs, it’s even worse for businesses which deal in digital services or mass communication products.

where in the world is that payment

So Why Does This Story Matter?

Because the Internet and Mobile Association of India (IAMAI) has used the publicity provided by this issue to push for the development of a payment recovery mechanism for their industry.

 

Several of the largest digital communication platforms and services are members of the IAMAI. And the organization is wisely using this move by Flipkart to justify enforcing meaningful out-of-court payment protections for the digital communication service industry in India.

 

The issue of late payment has been a given in the Indian business culture for a long time, to the point where it’s barely mentioned in mainstream media. Even according to law firms interviewed on the Flipkart matter by YourStory staff, this case has gained significance in the media only because a large brand like Flipkart was involved.

 

This is why, by this point, we’re sure you’re asking – How does this affect me as a small business? Of course Flipkart, a well-known brand, would be able to afford taking its clients to court. Yet if we, as small businesses, did the same – we’d probably be bankrupt by the time a verdict came in.

 

First, most late or non-payment situations can be addressed by integrating global best payment practices into your business – which Hummingbill’s Gmail plugin automatically does for you for free.

 

SecondIndian companies are gradually getting less court-shy in getting back money they’re owed by non-paying clients.

 

Third, the actions of the IAMAI shine a light on the necessity of out-of-court payment mechanisms.

 

Yet, none of the mechanisms put in place by the IAMAI’s committee will protect other non-member small businesses like you or us. Even though we need these defenses just as sorely.

 

With that in mind, we at Hummingbill are scaling up our war to break India’s late payment culture in the immediate future. The Indian business culture needs a concentrated effort to create better non-litigious protections which can be enforced. SMBs and startups need shielding from larger buyers who wish to exploit their position on the supply chain.

 

And for that effort, we will need the support of every single one of you. Keep an eye on this space for more information over the next few days.

 

In the meanwhile, let us know in the comments section below. If you had the ability to enact out-of-court enforceable protections against late paying clients, what measures (except straightforward mediation) would you put in place?

– Adam Walker & Aniket Saksena

The Business of Accelerators

Accelerators are in the business of creating Startups – or atleast taking the first bet. Its a startup of startups; Which means, everything they talk about as risk, in venture capital nicely gets bundled up and will get put on the head of what is the accelerator.

Going back to the basics, Now depending on which accelerator you are involved with, there might be two or three key milestones that they would provide as value:

  • Spit Polish your Pitch in a matter of weeks and put you in front of a lot of Investors and hope one of you becomes a hit (Usually this model also involves accelerating a lot of companies in one go)
  • Have an Alumni or a Brand that can give you early traction, and mentors who can give you an overview (working with a startup to dig deep will take a few weeks usually)
  • The hands-on accelerators that will work with a handful of startups, but will dig deep, have a few dedicate personnel whose job would be to help you eliminate market risk (have a product, but there is no market) and also help with Go-To-Market strategy, setting up a board, advisory etc. Thats really a deep dive model and most accelerators wont touch that route with a ten foot pole – we at the Startup Centre, however love doing that kind of stuff.

 

Depending on what level of support you are getting, the duration of the programme will vary, but you get an idea. All of them, in someway will put some money in, quite honestly that would be the easiest (valuation of the company is the lowest and shares are cheaper comparatively – it makes sense to do it).

Thats the Pledge, if you can call it.

The Accelerator Model, no matter how sexy it may sound is a very very complicated and fragile model. It throws the firm in the side of the entrepreneur than the VC. The VC gets rather hefty (or sizeable) management fees of the funds they manage (usually 1-2% of what they manage divided over 7-10years) and the managed fund sizes are usually in the three digit millions, so that usually covers for operations. Accelerators on the other hand, even if they have a fund, owing to the nature of making small bets, the fund size would be small and the management fee, so to speak, usually covers the legality in managing the fund. Nothing more – Yes there is hefty legal fees involved in auditors, lawyers and stuff when you manage a fund.

And the accelerator has the cost of infrastructure (if its provided), the man power, operational costs, and travel where they go around meeting companies. All of this comes from a very very thin shoe string budget in most cases.

That’d be the turn.

Now, are they making a sacrifice and killing themselves over a cause. Not at all. But however, the upswing for an accelerator is in that small amounts of equity that they are taking in. If you are a banker by any chance and can do a little bit of excel sheet math, you will realize that the Approx 10%  that is taken (out of which usually 70 – 80% belongs to whoever brought in the capital also called LPs), is very small and if the venture goes through two rounds of funding or so, will quickly become a 1-2% play (which is the “carry” that the accelerator makes – sameway a VC fund makes money)

Which means, in order for the accelerator to say make a million in a company (and it usually takes about 3-4 years to think about any reasonable exit, in most cases way more) the company has to be valued, literally, at a billion. The chances of building a billion dollar company? Well, the US has 20 companies that are listed and 40 companies that are privately held, who are billion dollar companies in the last 20 years. close to 30,000 companies get funded in the US per year, so you can see the odds.

What you get is a fantastic community. You work shoulder to shoulder with entrepreneurs and pushing them to be their utmost best, because quite literally you make money only when they do. Some accelerators – if they are short termed, will go the mass model way (put 30 – 40 companies in a batch), raise the valuation by 1x or 2x and want to dump it on someone else and go to the next batch. They make less money, but over volume, they make more.

Not sure, if that is a model that is exciting for us, personally. I’d rather be associated with one or two companies that stand out, and perhaps stand the test of time – solving real problems.

Honestly though, if anyone were to ask me if starting an accelerator was a good Idea, its not. Its hard work, but if you love working with entrepreneurs, this is the best place to be. Its a lot of community building, lot of hard work, with not much money to hire talent – a lot of lonely hours, but along the way you also have the possibility of building a few amazing companies.

That’s the Prestige.

PS: Most wont make it.