How Speeding Up Payments to Small Businesses Creates Jobs

Reducing payment times from 30 days to 15 days can have a significant positive effect

Even small improvements in cash collection can have large, direct effects on hiring.

Operating a small business, the backbone of the U.S. economy, has always been tough. But small businesses have been disproportionately hurt by the Great Recession, losing 40 percent more jobs than the rest of the private sector combined. Interestingly, as my research with Harvard’s Ramana Nanda shows, there’s a fairly straightforward way to support small businesses, make them more profitable, and hire more: pay them faster.

A major source of financing

When a business is not paid for weeks after a sale, it is effectively providing short-term financing to its customers, something called “trade credit.” This is recorded in the balance sheet as accounts receivable.

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Small business bears the burden of delayed or late payments

Jean

Your article hit home for me and my family. My brother had started a contract manufacturing, precision machining business. He financed the capital equipment with hard earned savings and a note on his home. CNC machine tools are not cheap as many know. He built his business by providing high quality work for a fair, negotiated price. As most entrepeneurs experience, his work week never really stopped. After several years gaining valuable, and valued, customers he began work for a well known aerospace company. (I certainly wish the 'name and shame' idea could come to life). The orders from the aerospace company grew rapidly until it was a significant portion of his revenue. They really liked his work as he was clever and capable of providing certain machined part form factors that were challenging for others.

In one phone call - it all came crashing down. The big aerospace company called and told him they had to extend payments out to 120 days as they were experiencing a rough financial patch. My brother negotiated, threatened, argued and pleaded as this action would certainly put him out of business and possibly lose his home. They had no empathy or willingness to negotiate and sadly, my brother had to close his business and auction all of the almost new equipment as his cash flow was so severely impacted by their actions. Fortunately, the auction netted enough to pay the notes and clear him financially. He is back to work 'for others' and may not engage in entrepeneurial activities again.

Closing the business meant job losses for a few people, and this was very sad. But it is really larger than that as your article points out. This customers forced payment extension also caused lost rent for the owner of the leased shop space, lost new business opportunity for my brothers suppliers, and lost taxes on wages etc., that would have been paid to the local, state and federal government.

Yes, it may have been possible to engage with the legal system to seek a remedy. However, the actions of a 'big customer' were so emotionally painful and draining that my brother had little energy left to spend on that. He was fortunate to get a good job almost immediately and moved on.

I support the concepts of improving payment schedules to suppliers, especially small business. We will need to incentivize 'big business' to achieve that. I doubt that being a good corporate citizen will be enough. If we cannot do that, then a 'name and shame' approach may help.

Thank you for a well written article, Jean.