Why America’s small businesses are becoming like banks
By Terra Terwilliger
The opinions expressed are the author’s own.
Over two years after the start of the Great Credit Crisis, banks are still not lending money. But big businesses know exactly where to go for a quick, interest-free loan … the little guy. Even as corporate profits recover, big companies continue to squeeze their small vendors, stretching out payment terms and writing late checks. Unfortunately, this blatant exploitation is damaging the small business economic engine that drives half of US GDP.
A friend who owns a small consulting company recently received notice from a Fortune 500 client that henceforth their payment terms would be extended from 90 to 120 days. No discussion, no recourse, just a fancy legalese version of “we’re going to start paying you later because it’s better for us, so get used to it.”
That’s as if your employer casually one day sent you a letter saying that they were going to start paying you 30 days late. Unfortunately, you wouldn’t be able to tell your landlord, the gas company and the supermarket the same thing. Your bills still have to be paid on time.
My friend is not alone. Last August, The Wall Street Journal published an article titled “Big Firms are Quick to Collect, Slow to Pay,” which revealed how companies with more than $5b in annual sales were systematically slowing payments to suppliers, while speeding up their own collections. The analysis showed that companies with revenues over $5 billion took an average of 55.8 days to pay suppliers, compared to 53.2 days a year earlier … and compared to the 40.1 days in which businesses with revenues under $500 million pay up.
The situation is not getting better. “We just updated our payables analysis for 2010,” says a spokesperson for REL Consultancy, the company that did the original WSJ research. “We see the same trends in 2010. Large companies continue to pay slowly, and they are still using their muscle to make their suppliers accept longer payment terms.”
Big companies not only force vendors to accept painful terms, they also don’t reliably pay up. According to the Experian Business Benchmark Report of July 2010, the average days beyond terms (days a company is late on paying according to its own billing standards) for companies with over 1,000 employees increased by 5.6% over the past six months, with 17% of all monies owed delinquent. Some of these delays are doubtless due to billing errors or legitimate disputes about payment. Some are bids to wring a few more days of cash flow out of already stretched vendors.
In an October 2010 survey from Discover Small Business Watch, 46% of small businesses reported that cash flow is a problem. In a similar American Express OPEN Small Business Watch survey released October 13, 53% of small business owners reported cash flow problems. Some observers have positioned these numbers as a comeback, saying things have improved since 2009. True, but comparing 2010 favorably to 2009 is like saying Hurricane Rita was a comeback for New Orleans because it was better than Katrina. Less bad is not the same as good, especially considering the human cost.
These numbers mean that half of the small businesspeople you see every day are having trouble paying their bills. Think about the small business owners you know — the guy who runs your local coffee shop, or the designer who helps with your company website. Chances are 50/50 that they’re worried about having enough cash to keep their business running.
My friend’s company, the one that is now getting paid at 120 days, has maybe 20 employees and a few million dollars of annual revenue. Every month, she pays workers, rents office space, and keeps the lights on. If she has to wait four months to get paid, she can’t hire staff, order computers, or otherwise invest in her business. Instead, she must hoard her cash to make payroll and hope that the check actually comes on time.
Policy responses to the small business cash flow problem have focused on increasing bank lending. No one is talking about big businesses’ responsibility. Small businesses across the US complain vociferously about payment problems, but only to each other. We don’t speak up because we don’t think we have any options. And we’re right. Big companies bully small vendors because they can. Small companies put up with arbitrary term changes and late payment because the alternative is no business at all. And no one can afford to turn down work in this economy.
Big businesses are letting cynical number-crunching get the best of common decency … and their own long-term interests. Small businesses are like elephants. We remember. When talented vendors someday decline work, or demand a higher rate, or payment up front, big companies may regret their shortsighted behavior.
My challenge to the Fortune 500 is simple. Pay your small vendors — say, all companies with under $25 million in annual revenue — within 30 days. You will win loyal partners for the future. And by injecting much-needed cash into small businesses, you will also be making a real contribution to turning the US economy around.
Terra Terwilliger is the founder and principal of Brigid Executive Consulting, which helps companies make new technologies work for their business.