Skip to content

Small Firms’ Big Customers Are Slow to Pay

Small Firms’ Big Customers Are Slow to Pay

In a recent survey, many small business owners reported that they are waiting longer for payment from large customers. This takes a toll as they struggle to stay afloat while they wait — often forced to borrow at high rates to cover the gap in working capital.  The repercussions can be felt beyond just the small business itself.  As they cut back on investing in new hires, research and development, this affects both the immediate community and the economy in general.  If small business, the backbone of the U.S. economy, is hunkered down instead of taking risks and investing in growth, the long-awaited recovery will be a long time coming.  With such a wide range of rates on small business loans, those seeking working capital while they wait for invoices to be paid would be wise to shop around.  A broker will have access to a wide variety of lenders, types of small business loans and can be a valuable asset in finding the best commercial financing at the best price.


Source: Wall Street Journal, June 6 2012, by Angus Loten

Small businesses are waiting longer for commercial customers to pay their bills as many big companies continue to hoard cash to bolster their own working capital.

The trend, which began in the recession and has worsened in recent years, is putting growing pressure on people like Nirav Sheth, who owns a Web-development company in Washington.

Anatta Design’s Nirav Sheth has had to postpone hiring and expansion due to a longer wait for payments.

Mr. Sheth’s seven-person Anatta Design has been forced to postpone hiring and expansion because of the longer wait for payment. Last year, for example, it sent a $6,600 invoice to an online retailer for several months’ work redesigning an online “shopping cart.” The entrepreneur, who says he didn’t have a line of credit to fall back on, received payment in full 404 days after the date on the invoice.

Many small-business owners say they’re seeing payments from larger customers stretch from 30 days to 60 and even 90 days after an invoice is issued. The longer wait is taking its toll on the companies, which often have to borrow at costly rates to fill gaps in their cash flow between payments.

“If you’re working with one of these large companies as your only customer, they have the power. They can go to somebody else, but you can’t go anywhere,” says William Dunkelberg, chief economist of the National Federation of Independent Business, a small-business lobby.

Up to 64% of the 850 small businesses the group surveyed last year reported having invoices that went unpaid for at least 60 days, and 20% said delinquencies were getting worse. Nearly all the companies surveyed had less than $5 million in annual gross sales.

“This is one area where large firms often take advantage of their market power to strong-arm small-business suppliers and customers,” the group’s report said.

At the end of the first quarter, companies in the S&P 500 Index had record cash holdings of more than $1 trillion, compared with $609 billion four years earlier. Nonetheless, over the past four years, such big companies as Apple Inc.,  Wal-Mart Stores Inc.  and Ford Motor Co. have generally increased the number of days they take to pay vendors, according to Charles Mulford, the director of the Georgia Institute of Technology’s financial reporting and analysis lab.

A Ford spokesman responded that 80% of the company’s $75 billion in annual purchases are paid within 40 to 45 days, a period that hasn’t changed in several years, and the rest are paid based on standard industry practices. The other companies declined to comment.

Wal-Mart took 29.5 days to pay its bills in the first quarter of this year, up from 27 days during the same period in 2009, for example, while Apple took 52 days, up from 43 days, says Mr. Mulford, whose analysis is based on the companies’ quarterly financial statements.

A study released in May by Experian, a global information-services company, found that overall, businesses earlier this spring were paying bills an average of 7.6 days past due, a 14.1% increase from the same period last year. The biggest companies in the study—those with more than 1,000 employees—had the sharpest year-over-year increase in late-payment days, up nearly 28%, the report found.

Businesses in 2012 are waiting an average of 29.2 days for payments after issuing an invoice, up from 22.83 days in 2009, according to an analysis by financial-information concern Sageworks of its own database of more than 500,000 financial statements for private companies. More than 80% of the statements are for companies that have less than $10 million in annual revenue.

If small companies aren’t getting paid on time, then “as a result they’re not making a lot of investments in research and development or hiring,” says Alicia Robb, a senior researcher at the Ewing Marion Kauffman Foundation, a Kansas City, Mo., nonprofit group that describes the phenomenon as a potential “drag” on the economic recovery. Of nearly 5,000 small businesses, 14% cited late payments as their biggest business challenge in 2010, up from 2% in 2008, according to the latest available data in an ongoing study by the Kauffman Foundation of U.S. start-ups. The study began in 2004 and tracks the start-ups’ challenges over time.

Some business owners say there’s sometimes a trickle-down effect from longer waits for payment. “We have to go back to our suppliers and say we need to extend our terms,” says Chris Shult, president of Bevco Engineering Co., a 60-employee company in Sussex, Wis., that builds control systems for conveyors, MRI machines and other systems.

Mr. Shult says at least one of his Fortune 500 customers, whose name he declined to disclose, is pushing for a 120-day payment term. “The choice they give you is take it or leave it,” he says, adding that the company has invoices outstanding ranging from $50,000 to well over $100,000 apiece.

Mr. Shult says he has been forced to dip into a line of credit: “You’re collecting a lot slower than you’re paying out, so it stunts your growth.”

The average rates for corporate debt have dropped sharply in the past year, according to the Barclays Investment Grade Index, which tracks average rates on highly rated debt. Companies could borrow from the bond market at an average 3.35% as of June 4. Meanwhile, rates on the small-business loans charged by banks and alternative lenders are often in the double digits, though they can range from 6% to more than 20%.

Last year, James Callahan laid off 16 of the 17 employees at his Albertville, Ala., aircraft engineering company because of unpaid bills. The firm, which designs FAA-approved repairs for major airlines, was owed as much as $50,000 by a single client, and Mr. Callahan believes the airline was trying to keep its maintenance costs down by delaying payments.

With competition for clients tough, many small companies are reluctant to appear heavy-handed about delinquent invoices, especially when large customers are involved.

But “there are absolute limits to how long companies can push their payables,” says Mr. Mulford. “At some point, vendors push back through open negotiation or higher prices.”

Mr. Sheth, of Anatta Design, says he’s now focusing on developing clients among mid-size companies. Based on his experience, he says, they have a better track record than very large or small companies when it comes to paying their bills on time.