The Silent Killer of Kenyan SMEs: Why Delayed Payments Are Worse Than Taxes, Corruption, And Competition

Kenyan SMEs are dying, not because of poor business models, bad leadership, or even excessive taxation—though these are significant challenges—but because of one brutal, suffocating reality: delayed payments. This is the slow, invisible killer that has destroyed more businesses than any economic crisis. It is the reason why brilliant entrepreneurs are shutting down operations, why young businesses struggle to see their second anniversary, and why Kenya’s economic engine is losing steam. While policymakers focus on tax reforms and credit accessibility, the elephant in the room remains unaddressed—cash flow strangulation caused by unpaid invoices.

A 2023 report by the Kenya Association of Manufacturers (KAM) found that over 60% of SMEs in Kenya face significant cash flow challenges due to delayed payments. The problem is particularly rampant in sectors where small businesses supply goods and services to government institutions and large corporations. The average waiting time for payments in Kenya has risen from 30 days in 2018 to nearly 90 days in 2024, forcing businesses to operate in survival mode. For a small business that relies on every shilling to sustain operations, this delay is the equivalent of financial asphyxiation.

The law is clear on payment obligations. The Public Procurement and Asset Disposal Act (PPADA) of 2015 mandates that payments for goods and services delivered to government institutions be made within 60 days unless otherwise agreed. Yet, government ministries and agencies are among the worst offenders, with billions of shillings in unpaid bills. The Late Payment of Commercial Debts (Interest) Act allows suppliers to demand interest on overdue payments, but enforcement is weak, and many SMEs lack the legal muscle to challenge non-compliant clients. The result? A culture of impunity where businesses are forced to absorb financial shocks caused by their customers’ irresponsibility.

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For SMEs, delayed payments mean an immediate cash flow crisis. Unlike large corporations with reserves and access to low-interest loans, small businesses depend on daily revenue to keep the lights on. When payments are delayed, landlords demand rent, suppliers refuse to extend credit, and employees—who have families to feed—cannot be paid on time. The consequences ripple through the economy, causing widespread financial instability.

A survey by the Kenya National Chamber of Commerce and Industry (KNCCI) revealed that 43% of SME closures in the last five years were directly linked to delayed payments. This is a higher rate of business failure than those caused by excessive taxation, regulatory challenges, or competition. SMEs that manage to stay afloat are often forced into debt, taking expensive short-term loans to bridge the gap. The irony is that while these businesses struggle to get paid, they must still meet their tax obligations, including VAT, PAYE, and corporate tax, on transactions for which they have not received actual cash.

Delayed payments create a vicious cycle. When a business is not paid on time, it, in turn, cannot pay its suppliers, employees, or service providers. This ripple effect weakens the entire supply chain, increasing the likelihood of financial distress across multiple industries. In some cases, SMEs resort to paying their employees late, reducing morale, productivity, and retention rates. Others are forced to negotiate with landlords for extended payment terms, risking eviction or lawsuits.

The banking sector plays a cruel role in this crisis. SMEs that face delayed payments often turn to bank overdrafts and short-term loans to cover operational expenses. But with interest rates on unsecured loans ranging between 13% and 25% per annum, many businesses find themselves paying exorbitant amounts just to stay afloat. Some resort to shylocks, where rates can go as high as 30% per month, leading to a financial death spiral. The end result is an SME sector drowning in debt due to circumstances beyond its control.

Delayed payments also kill innovation. Entrepreneurs who should be focusing on scaling their businesses, investing in new technology, and expanding their markets are instead spending their time chasing payments. This wasted time and energy could be used to develop new products, train employees, or improve service delivery. Instead, it is spent making endless calls, sending emails, and following up on invoices that remain unpaid for months.

For the Kenyan economy, this is a disaster in the making. SMEs contribute over 40% of Kenya’s GDP and employ nearly 83% of the workforce in the informal sector. When they struggle, the entire economy feels the pinch. Reduced cash flow in small businesses leads to lower consumer spending, reduced investment, and slower economic growth. The government’s ambitious economic transformation agenda cannot succeed if the backbone of the economy—small businesses—is being crushed under the weight of unpaid bills.

Legal frameworks exist but are toothless. Countries like the UK and EU have strong policies that enforce payment timelines, including penalties for late payments. In Kenya, the lack of enforcement makes the law ineffective. Businesses fear blacklisting if they press for payments too aggressively, so they remain silent even as they suffer. The government must take responsibility by ensuring that payment delays, especially in public procurement, are addressed. A proposed “Prompt Payment Act” with clear penalties and enforcement mechanisms could be a game-changer.

The government itself is the biggest defaulter. As of 2024, pending bills owed to SMEs by the national and county governments exceed Ksh 500 billion. Some debts date back over four years, causing businesses that supplied goods and services in good faith to collapse. The situation is so dire that some SMEs that secured government tenders in 2020 have never been paid, despite fulfilling their contracts. A government that claims to support entrepreneurship cannot be the biggest obstacle to SME growth.

Delayed payments also undermine investor confidence. Foreign and local investors looking to partner with SMEs hesitate when they see the systemic cash flow challenges caused by non-payment. No investor wants to put money in a sector where payments are unpredictable, and working capital is always at risk. This further limits the ability of SMEs to attract capital for growth.

Another overlooked consequence is the social impact. When SMEs struggle, families suffer. Employees who do not receive salaries on time struggle to pay school fees, medical bills, and rent. Some entrepreneurs, unable to cope with financial stress, fall into depression or resort to desperate measures, including selling personal assets or engaging in unsustainable borrowing. The mental health toll of delayed payments on business owners is immeasurable but deeply damaging.

To solve this crisis, multiple stakeholders must act. First, the government must clear its pending bills immediately and ensure that all future payments follow strict timelines. Second, the private sector must be held accountable through laws that mandate prompt payments, with penalties for defaulters. Third, banks should develop SME-friendly financing solutions that do not exploit struggling businesses. Finally, SMEs themselves must learn to negotiate better payment terms and use technology to track and automate invoicing and follow-ups.

If Kenya is serious about becoming an economic powerhouse, it must stop killing its most valuable resource—its small businesses. Delayed payments are not just an inconvenience; they are a weapon of mass destruction against entrepreneurship. No tax incentive, no government grant, no policy initiative will ever compensate for the damage caused by delayed payments. The solution is simple: pay SMEs on time, and watch the economy thrive.

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