SMEs' average time to settle debt shortens in year-on-year basis

SINGAPORE'S small and medium-sized enterprises (SMEs) have become more "credit" smart with a growing number tightening their terms and conducting more due diligence before extending credit to their clients.

The average time taken by an SME to settle a debt has fallen substantially in the last 12 months, said DP Information Group, Singapore's provider of business and credit information services.

Based on the days turned cash (DTC) national average for the last four quarters, SMEs took an average of 29 days to settle their debts, down from the 43 days a year ago.

Singapore companies took an average of 29 days to pay their bills after the debt had become due in the second quarter of 2016, the same time taken in the first quarter.

Just over half (52 per cent) of companies paid their bills on time during the second quarter, a slight improvement on the first quarter of the year, DP Info said.

Singapore's wholesale companies were the most improved bill payers in the second quarter of 2016.

They took 36 days to settle their bills in Q2 2016, compared to 44 days in Q1 - improving their payment speed by eight days.

The wholesale sector has enjoyed a strengthening of their financial position as the Singapore dollar improved steadily throughout the quarter. The higher Singapore dollar means that the cost of paying overseas suppliers is reduced, leaving wholesale companies in a healthier cash flow position, DP Info said.

Lincoln Teo, chief operating officer of DP Info, said that the shift towards SMEs' shorter payment cycles has been consistent for several quarters.

"A faster payment velocity has become the 'new normal' for SMEs. We are seeing fewer examples where a purchasing company leverages favourable trade credit terms and uses them to improve their cash flow position at the expense of their creditor."

Singapore SMEs are not allowing their clients to obtain easy credit terms from them, as the cost of providing this funding is compressing their margins, said Mr Teo, who added that SMEs are employing three specific strategies which are leading to the faster payment of debts.

The first, said Mr Teo, is that SMEs have tightened their trade credit terms by requiring larger down payments or stipulating shorter periods of credit terms.

This behaviour has a knock-on effect on other SMEs - when a creditor company tightens its terms, then the debtor company must do like likewise with its customers or face a cash flow shortfall, he said.

SMEs are also making more credit checks to ensure that they do not end up with a business partner with poor financial background and this has heightened the level of vigilance has become necessary in the face of increasing bad and doubtful debts. This measure has helped drive the DTC average down.

The third is that DP SME Commercial Credit Bureau has observed more SMEs coming forward to share their payment intelligence with other SMEs.

That way, if one company has a debtor that starts to show signs of financial stress, then all member SMEs can be alerted to it and take steps to prevent a default, Mr Teo said.