Tough Talk: Slow Pay Kills a Small Business

I recently read an article in the Wall Street Journal by Angus Loten (Small Firms’ Big Customers are Slow to Pay, June 6, 2012) regarding the squeeze large companies have been putting on small businesses. Big customers are taking increasingly longer to pay invoices. Experian-Moody’s Q1 2012 Benchmark Report shows that companies with 1,000 employees or more pay their bills on an average of 7.8 days late. This is a 27.8% increase from just a year ago.

Apple is reported to now pay in 52 days up from 45 days just a year ago. Ford says they pay 80% of their bills in 40 to 45 days. One of the worst of the worst is GE Energy Systems who have a policy to pay in 120 days. If they elect to pay earlier they take a discount (GE Energy Standard Terms of Payment Rev H, Issued February 1, 2011).

Politicians are quick to proclaim how small businesses fuel the economy with job creation and economic growth. Unfortunately, it is the biggest businesses that foster policies that kill these same small businesses. And it’s interesting how some of the largest companies bankroll our politicians’ campaigns.

My business professors taught me that you should always factor in the cost of money when considering a transaction. Back then (the early 1980s), interest rates hovered in the 12 to 15% range and it made good sense to hold onto your money as BY KEVIN BILLER long as was reasonable to collect TOUGHTALK the interest that would invariably hit your bottom line. Nowadays, razor thin returns on deposits jettison that strategy.

So why do large firms use their small vendors to bankroll their business? I can only imagine that it’s because they can. Perhaps their shareholders applaud their cunning accounting acumen and cheer the manner in which they bolster their working capital numbers for next quarter’s financial report. The sad truth is small businesses seldom have the leverage to extend the payment terms to their vendors. In fact, most suppliers are reluctant to extend any terms to a fledgling organization and may require prepayment or COD terms. Even with a little bit of working capital, it’s a race to see if your financial obligations don’t bury you before your receivables land in your operating account. Far too many small business owners find themselves watching their mailboxes to make payroll.

I have had personal experience negotiating a contract and payment terms with a large customer. I recall incessantly beating my head against the wall with the procurement department over payment terms to no avail. To my astonishment, I learned that in nearly every case the payment terms were sacrosanct; however, the cost of the service or product tendered was negotiable. After struggling in utter frustration to secure better payment terms I threw up my hands and declared, “If you are going to use my company as the source of a short term loan, then I am going to raise my fees accordingly.” I re-quoted the proposal with an 11% hike in fees for the services to be provided. I thought that this would definitely squelch the deal, but to my surprise, the pricing of my services was nary a concern. The proposal and contract sailed through the procurement department. Lesson learned.

So, what’s a small business to do? Here are a few suggestions on how to deal with big customers who thrust onerous payment terms on your small business.

• Negotiate the best you can up front. Occasionally you can win better terms.

• Be aware of the possibility of providing invoices that can be paid quickly with corporate PCards (purchasing cards). Sometimes you can split a charge into two or more invoices that do not exceed the limit a buyer can place on a purchasing card (typically $1,500 to $2,500).

• Offer a discount for customers to pay early. Oftentimes you can give a 1.5 to 2.0% discount if payment is received in 10 days or less.

• Waste no time in submitting an invoice. Do so electronically and offer payment acceptance through direct deposit and ACH payment to your bank.

• Provide better service to those who pay quickly than to the slowpokes.

• Refuse to ship new orders if a customer is delinquent more than 10 days.

• Politely harangue your customers as soon as their invoices become 5 days late. Keep reminding them every few days until they pay.

• Fire those who pay too slowly.

• Sell your receivables to a factoring agency.

A quick word about selling your receivables to a factoring agency: The practice called “factoring” involves selling your receivable to a financing firm that does the collection for you. In return, they pay you 75 to 90% of the receivable up front, and then pay you most of the remainder when they collect. For this service they take typically take a 3 to 5% commission. Most factoring firms will only buy receivables of customers with high credit ratings. If you plan to go this route, you better have the cost of this service included in your selling price.

What is really needed is for large companies to treat their suppliers not as adversaries by squeezing every last penny out of them, but as partners with a common business goal. By establishing a partnership mentality, large customers will better understand the cash flow needs of their suppliers, especially their smaller ones and find ways to deliver payment in a much more humane fashion. In doing so, they will undoubtedly support the primary engine that grows and sustains our economy.

Kevin Biller is a contributing editor of Powder Coated Tough magazine. He can be reached via email at kbiller@powdercoating.org.