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In order to foster the growth of MSMEs, the Government of India has made a separate law known as the Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006. To facilitate growth and development, the MSMED Act lays down various rules and regulations. In this regard, the MSMED Act includes MSME payment terms for suppliers and vendors. This article elaborates on the MSME payment terms laid down by the Government of India, types of payment terms, and tips to get timely payments.
What are the MSME payment terms?
Here are some key points that the MSMED Act suggests about MSME payments.
As pr ethe government’s MSME payment terms, mentioned in the MSMED Act, you should receive payment within 45 days from your buyer or the buyer should abide by the terms mentioned in the contract. It works vice versa too. You should make payments to tour vendors within 45 days of the delivery of goods or services. This guideline helps MSMEs to receive timely payments. It helps reduce cash flow challenges for MSMEs.
The MSMED Act advises MSMEs to draw a formal contract between buyers and suppliers. This can specify payment terms and conditions. This contract also specifies other conditions such as interest on delayed payment, delivery times, etc.
Importance of clearly documented payment terms
Although the MSMED Act outlines payment terms to relieve the distress caused by delayed payments, the government of India encourages all MSMEs to have a contract in place. Here is why it is important to have a contract along with payment terms:
- It helps parties both parties when to expect payment.
- The rate of interest chargeable or late fees in case of delayed payment is mentioned.
- One can also clearly mention the accepted mode of payment
- What are the guidelines for delayed payment of dues?
Section 15 of the MSMED Act suggests that the supplier can charge interest to the buyer on the delayed payment.
- In the case of a contract, the rate of interest on delayed payment can already be mentioned in the agreement.
- In case of the absence of a contract, the supplier can charge interest that is 3 times the bank rate notified by the RBI.
What are the different types of payment terms?
Although the MSMED Act suggests making a payment within 45 days from delivery, the buyer and seller can mutually agree upon different payment terms. Here are some of the popular payment terms.
To be paid in 15/30/45/60 days: Most B2B businesses offer a credit period of certain days. Depending on the mutual agreement, it can be 15, 30, 45 or 60 days. In rare cases, credit period is extended to 90 days. Such payment terms are more popular in the case of regular business.
Advance payment: A few companies prefer to receive payment before the delivery of goods or services. This kind of payment is more popular in B2C businesses. However, if the buyer is availing one-time service or goods delivery, the supplier may have the term of advance payment.
Partial payment: Another type of payment term is partial payment. In some cases, the buyer needs to make some percentage of the payment before the delivery. The rest of the payment is made after the delivery of goods and services.
Cash on delivery: When the payment is expected at the time of delivery, it is known as cash on delivery (COD). It is a common type of payment term in e-commerce businesses.
What if the payment is not made as per the payment terms?
In case the buyer is not making a timely payment. Here is what you can do.
- Send reminders: Sending timely invoices is just not enough. You need to send reminders to the buyer about the due date.
- Follow-up calls: Along with reminders, you need to call the finance personnel, who might be responsible for making payment to remind them that your payment is due.
- Late payment fees: As the due date nears, you need to remind the buyer about the payment terms you mutually agreed upon and possible charges that they will have to pay.
- Charging interest/late fees: After multiple reminders, if the buyer still does not make a timely payment, you can send a revised invoice along with the interest/late charges payable.
- Negotiating on payment terms: There could be a possibility that the buyer is undergoing financial difficulties and is unable to make a timely payment. In such cases, depending on your business relationships, you can negotiate the payment terms and offer them an option of part payments or extend the due date by a few days. Such a gesture can help you to maintain a healthy relationship with the customer.
- Lodging a complaint: In case all the above steps fail, you can take the help of a grievances or complaints mechanism set up by the government of India.
Can an MSME complain against delayed payment?
In case, the buyer fails to make payment within the specified time i.e., 45 days or the timeframe mentioned in the contract, the government has set up a mechanism to resolve distress.
According to the MSMED Act, distressed MSMEs can file a complaint to the Micro and Small Enterprise Facilitation Council (MSEFC) through the MSME Samadhaan portal.
What is MSME Samadhaan?
The MSME Samadthaan portal is an initiative launched by the Ministry of MSMEs. The main purpose of the initiative is to settle problems of delayed payments and relieve distressed MSMEs.
It is a transparent platform and, once the complaint is lodged, it is visible to everyone.
Once the complaint is lodged MSRFC council works towards resolving the dispute. The council examines the matter. If the supplier’s claim is right, the buyer is ordered to make payment along with the interest.
Tips to get timely payments
As it is the responsibility of the buyer to make timely payments, the supplier needs to be proactive in sending reminders and follow-ups. Here are a few tips to receive timely payments and avoid delayed payment situations.
- Document everything: Documentation is key. You need to document crucial aspects such as the date of delivery, due date, late fees, etc. In case you have to complain, the documentation plays a key role.
- Draw a contract: In case you are going to form a long-term relationship, it is important to draw a contract. The contract should explicitly mention timelines of delivery of goods and credit period, payment terms, etc.