EFFECT OF PAID ADVANCE PAYMENTS ON PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES (SMES): EVIDENCE FROM NIGERIA

Abstract

The study investigates the effect of paid advance payment on business performance of SMEs and identifies solutions to the effect of SMEs paid advance payments in Nigeria. The study adopts cross-sectional and survey research designs. Structured questionnaires were used to collect primary data from randomly selected SMEs that are appointed distributors of local corporate firms which operate in the foods, beverages, and breweries sectors of the Nigerian economy. The results reveal that paid advance payments of SMEs to their corporate firms’ suppliers for which goods are not supplied timely impact negatively on their business performance: It ties down their working capital which when it is a borrowed fund from financial institutions is at cost. It prevents the SMEs from doing other profitable businesses, reduces the business turnovers, increases the business cash conversion cycles, and invariably reduces the business’s profitability. In view of the financial power at the advantage of the corporate firms, it is recommended that government policies should mandate the corporate firms to publish the stipulated time they would deliver goods for all paid advance payments of the SMEs after taking into consideration the locations of the SMEs and transportation logistics. Thus, non-delivery of the goods within the published stipulated time would earn SMEs interest on their paid advance payment at Central Bank Nigeria (CBN) Monetary Policy Rate (MPR) for number of days the actual time of delivery is more than the published stipulated time. This is to discourage the tying down of the SMEs working capital.