The companies are hugely dependent on their cash flows. But if they push their slow payers too hard, they risk losing customers. Hiring collection attorneys is also expensive, and if late payers are pushed into bankruptcy, their small-business creditors may find themselves empty-handed, waiting at the end of a long queue.
“The last thing you want to do is get in an adversarial position with your great clients; they’re your lifeline,” says Charles Doyle, managing director at Business Capital, a San Francisco company that helps businesses restructure their debts.
That’s why many businesses that are owed money are relying on cooperation rather than strong-arm tactics. “If you’re going to make it through the next 18 to 24 months, you’ve got to be open for alternative ways to get paid or you’re not being a realist,” Mr. Doyle says.
Last fall, more than half of the customers of UnitedCompanies Inc., a Houston-based handler of plastic resin, were more than 30 days past due on their bills. The company’s bank had slashed its credit line 20%, to $2.4 million. UnitedCompanies was paying its own bills late, because of the cash-flow crunch.
Marc Levine, chief executive of the company, which has 350 employees and $40 million in revenue, began personally calling customers who were more than 30 days past due. He says he explained that he needed to be paid because his business was suffering, too.
“I made sure I told them how much we loved them,” he says, “but in order to do a fine job in serving them, I needed them to accelerate payment and return my cash flow to where it was in summer ’08 and prior.”
Mr. Levine says his personal approach worked, and many of the customers paid up after his call. He adds that he also stopped shipping for some small, financially weak customers until they began paying within 30 days. And he made some cost cuts, including laying off about 50 employees.
Some companies have been forced to take drastic steps with longtime clients. Peter J. Bredlau Jr., president of heating and air-conditioning company Quality Service Associates Inc., says he started seeing more of his customers paying late over the summer, with payments stretching to 45 to 60 days from 30 to 45 days. Today, more than half of the Roselle Park, N.J., company’s clientele of office managers, building owners and general contractors are overdue on their payments.
“That extra 15 to 20 days that people are not paying has had a pretty significant impact on my ability to keep up with my vendors,” Mr. Bredlau says. “It just slows the cycle down.”
- Small businesses average $1,500 in overdue payments from customers each month.
- 42% of small businesses say “getting paid quickly” is a key issue keeping them up at night.
- Nearly 40% of small-business owners have invoices that exceed 30 days.
Source: Intuit Inc.
Note: Based on a 2008 Decifer Inc. survey of 751 businesses with fewer than 10 employees.
With longtime customers, he makes a point of handling the late payments himself. “Those relationships have gone back to the ’80s with my father,” he says. “They still operate on a handshake and a promise, which is a great way to do business as long as you get paid.”
With customers who aren’t paying on time, an accounts-receivable clerk chases the money every day. Ultimately, those who don’t pay lose the ability to make emergency calls to the service department. When the customer tries to call, the call is intercepted by the accounts-receivable clerk, who tells them to have a check ready when the technician shows up.
Many small companies are trying to strike a balance between aggressively pursuing late accounts and adopting policies that help their customers get up to speed.
Vanguard Services Inc., an Indianapolis-based company that contracts out truck drivers and had about $42 million in 2008 revenue, began a more aggressive collections process when it started noticing payments slowing down last April. Instead of mailing invoices, it began emailing them so that customers would receive them sooner. The company, which rarely made collection calls before, now calls customers within a day or two of a payment being late.
It also tries to develop several personal contacts within a company. “The more points of contacts you have and the more you know these people personally, the more trust you’re going to have,” says Chief Executive Jim Malarney.
At the same time, the company began giving customers more payment options. For instance, it let customers pay using American Express in exchange for a 3.5% transaction fee, and it offered to let them pay via wire transfers — which can sometimes be more convenient for the payer, as well as speeding up payments for Vanguard.
Since it started the new collection procedures, Vanguard has reduced its past-due accounts to 7% to 8% from 25%.
The smallest companies often feel they’re especially at the mercy of bigger customers. Susana Ortiz, president and chief executive of specialty baked-goods company Caroline’s Desserts in Redmond, Wash., says she was surprised that as many larger retail customers as smaller boutique customers were paying late. About 18% of the company’s accounts are late — up from 1% or 2% a few months ago. If you’re small, she says, big companies think they can wait to pay you.
Ms. Ortiz has had to delay hiring and buying new equipment because of the lack of cash flow, and she has been forced to use personal funds to pay bills. Nonetheless, she says, she’s “working with people when they have issues,” adjusting terms.
The more pressing problems, she says, involve newer clients who don’t have a relationship with her. In a handful of cases, new clients placed three or four orders over a couple of months and never paid. Then they stopped ordering and stopped answering their phones. As many as two dozen invoices — some as large as $2,000 or $3,000 — are 90 to 120 days old and may never be collectable.
Ms. Ortiz says she is considering suing to recover the money, but she adds that she knows that the cost of the suit may well be more than she would be able to recover.