Micro, small, and medium enterprises (MSMEs) face many challenges in running their operations smoothly. One of the biggest of these challenges is the lack of sufficient working capital. MSMEs need reasonable working capital to carry out their day-to-day operations, pay utility bills, and pay salaries to their employees.
A major chunk of this working capital is the payment MSMEs receive from their buyers for the products/services delivered. However, when buyers don’t make these payments on time, MSMEs face a lot of difficulties in running their operations. Many businesses stop their operations as they don’t get proper funds on time.
The 45-Day and 15-Day Rule
The Government of India has devised a new payment rule under the MSME Act to avoid late or missed payments. In this blog, we will learn more about the new 45- and 15-day payment rule, which protects MSMEs against defaulters and gives them the confidence to move forward with their operations.
Sections 15, 16 and 2(b) of the MSME Act 2006 have defined the credit period and the new payment rules for MSMEs. The 45-day payment rule can be better understood through the following points:
- The supplier (MSME, in this case) sells goods/services to the buyers.
- The buyers and the suppliers agree on a specific period by which payment has to be made for the goods/services delivered.
- The time between the sale date and the actual payment date is called the credit period.
- According to the MSME Act, buyers must now pay the suppliers within 45 days of receiving the goods/services.
We have explained the 45-day payment term here.
So, where does the 15-day payment rule fit in? Here are a few scenarios to give you a good idea of this rule.
When buyers and suppliers haven’t agreed on any date of payment
If the buyers and sellers haven’t agreed on a credit period at the time of the transaction, the payment must be done within 15 days from receiving the goods/services, according to the MSME Act.
When buyers and suppliers have agreed on a credit period of more than 45 days
We have already seen that the MSME Act requires buyers to pay the suppliers within 45 days of receiving the products/services. However, what does the rule say if both parties have agreed to a credit period of more than 45 days?
According to the rule, the suppliers still have to pay the MSMEs within 45 days of receiving the goods/services. This is to provide stability and better cash flow management for the MSMEs/
When buyers and suppliers have agreed on a credit period of more than 15 days but less than 45 days
Sometimes, buyers and MSMEs mutually agree on a credit period that doesn’t fall under the Act's 15-day or 45-day payment terms. In this case, the buyers have to pay within the agreed-upon period.
For example, if both parties have agreed that payment needs to be made within 30 days from the date of delivery of products/services, this holds good, and the 45 and 15-day payment rules don’t apply in this case.
What can MSMEs Do if Buyers Don’t Follow the Payment Rules?
Since the new payment rules of UDYAM give MSMEs protection and authenticity, they can be assured of on-time payments from suppliers. However, even if they don’t receive their payment within 45 days, 15 days, or the agreed credit period from the date of delivery of products or services, they can file a complaint with the facilitation council.
According to Section 16 of the MSME Act, buyers have to pay interest rates on delayed payments. A few important points about these interest rates are:
- Interest rates are compounded monthly.
- Interest rates are three times the rate specified by the Reserve Bank of India.
- Interest rates are calculated from the day following the day when the credit period ends (after 45 days, 15 days, or the mutually agreed credit period).
Bottom Line
The Government of India has taken many initiatives like UDYAM registration, easier access to credit and other incentives for MSMEs. The new MSME payment rule is one such effort to help these businesses have enough cash on hand to run their routine operations.
Due to the fixed payment days, exorbitant rates and facilitation councils to act on delayed payments, MSMEs have a better chance today to pay on time. This gives them enough funds to grow, expand and run their operations without disruptions.
