01 Jun Lock-box unlocks sme growth potential
President Cyril Ramaphosa, during his 2020 State of the Nation Address, has urged participants in the private and public sector to find sustainable solutions to combat and reduce inequality, poverty and unemployment. The public sector has committed to assist small to medium enterprises (“SMEs”) from a procurement perspective. In addition, many private sector companies have committed to supporting SMEs through their procurement processes.
The problem for SMEs and suppliers
Most SMEs are not in a position to pay for the goods and services that they need in order to fulfil their obligations to their customers. They therefore need to be supplied on credit, which means that any company selling to them must take on the risk of non-payment or late payment by the SME. This is because the SME’s client may fail to pay or delay payment or the money could be lost through fraud or theft on the part of the SME.
A compounding factor is that even in instances where the private sector is prepared to grant credit to the SME, the credit insurance coverage that such supplier can access to cover the probability of SMEs defaulting on their obligations, is normally insufficient to cover the credit under consideration.
If these challenges persist they will limit the growth of SMEs.
The ‘Lock-Box’ Technology
Mettle Specialised Finance (Pty) Ltd (“Mettle”) and its sister company, Incatorque (Pty) Ltd (trading as “G-PAY”), have, together with SME suppliers and a well-known insurer, developed a “lock box” bank account (“the Lock-Box”) that functions in a manner that addresses the risks and requirements of those involved in the SME supply process. In particular, it manages the automated flow of payments between parties in the supply chain and removes the risk of manual intervention that could cause cash to flow to unauthorised parties or accounts.
The Lock-Box is a bank account independently administered by Mettle with any of four retail banks in South Africa integrated on the G-PAY platform. The rules regarding the payment flows and processes that the account is managed by is recorded in the agreement between the SME, its supplier and Mettle and configured in the G-PAY system. The SME’s customer (the end user that is the public or private sector client of the SME) will remit the proceeds of the SME’s invoice for the supply of the goods or services into this bank account. The rules of the Lock-Box will ensure that the SME’s supplier’s invoices are settled first, whereafter the remaining balance, after fees, is released to the SME.
The operational mechanics of the Lock-Box are set out in the following example:
On 1 February 2020, Sipho Ngubani (Pty) Ltd (“SME”) obtains a tender to supply 100 laptops to the Department of Sport and Recreation (“End-Customer”), to the total value of R 1 000 000. The SME approaches Xolile Computers (Pty) Ltd (“Distributor”) to procure the supply of the 100 laptops on credit. The SME does not pass the Distributor’s credit requirements.
Either the SME or the Distributor contacts Mettle about the possible use of the Lock-Box. Mettle facilitates the conclusion by the Distributor, the SME, Mettle and G-PAY of an agreement that in essence records (1) the terms of supply and payment between the Distributor, the SME and the End-Customer, (2) the payment rules and recipient bank accounts of the Distributor and the SME, which will be programmed into the Lock-Box, (3) the terms of the service that G-PAY will provide, and (4) the bank charges and fees payable to Mettle and G-PAY for the use of the Lock-Box.
Once the agreement has been completed Mettle will open the Lock-Box and confirm with the Distributor and the SME the amount that will be paid for the supply of the 100 laptops, say, R 800 000.
The Distributors delivers the laptops and the SME renders the invoice to the End-Customer.
On 28 February 2020, the End-Customer effects payment of the R 1 000 000 into the Lock-Box, assuming 30-day credit terms were agreed between the SME and the End-Customer. Mettle oversees the settlement of the following payments by the G-PAY platform as follows:
- Firstly, to the Distributor (based on the bank account information provided): R 800 000;
- Secondly, to the SME (based on the bank account information provided): The balance less the agreed bank costs and fees; and
- Lastly, the fees due to G-PAY and Mettle.
Thereafter, Mettle will confirm receipt of payment with the Distributor (the G-PAY portal will have sent the Distributor an automated confirmation as well) and once receipt has been confirmed, Mettle will confirm receipt by the SME of its margin and the computation thereof. Thereafter the transaction is closed.
Risks are present when managing the flow of any payments. The Lock-Box has been designed to mitigate the risks in the manner set out in Table 1. It should however be noted that the Lock-Box is not a guarantee and cannot address the risk of the End-Customer not honouring its obligation to pay the SME at all or on time.
Both the public and private sectors will need to stop having conversations about what is wrong or making observations in broad terms about what is needed to build our economy. Every challenge has a solution but it will take a different kind of insight to unlock South Africa’s potential.