As Washington debates whether to tax big corporations that don’t pay a higher minimum wage, maybe now’s the right time to also fix another corporate sin: paying their smallest customers on time.
For me – and countless others like me – getting paid by big companies and big government is the worst part about running a small business. Sure, most of my clients pay their bills when asked. But there’s always a few that pay well past 30 days. And those few are almost always my largest customers.
Ask any small business owner and they’ll tell you how frustrating it is to get money from their biggest clients. Corporations, because of their power, dictate the terms of payment. They oftentimes require onerous paperwork. Their systems are purposely impersonal and bureaucratic. And while my smallest clients almost always pay on time, it’s the bigger ones that push their payments out 60 or 90 days, regardless of our pleas for cash. “It’s just our policy,” a bored accounts payable clerk told me recently. “You’re just going to have to wait.”
Payment delays from big organizations have always been a big headache for small businesses, and the problem became even worse during the pandemic. USA Today reported in 2020 that large companies with more than 500 employees paid their suppliers 15.6 days late on average, up from just under 10 days a year earlier. But this isn’t just pandemic-related.
As far back as 2012, the Wall Street Journal cited a report from the National Federation of Independent Businesses that found that the average (large) business is paying their bills 22.80% later than agreed upon terms. “If you’re working with one of these large companies as your only customer, they have the power,” William Dunkelberg, the chief economist of the organization told the Journal. “They can go to somebody else, but you can’t go anywhere.”
Other studies correlate. For example, a report from the Transformers Foundation found that 25 companies surveyed in the denim supply chain admitted to “destructive” behaviors from their corporate clients. A 2019 study from The Hackett Group, Inc found that “upper quartile companies converted cash three times faster than median performers, collected from customers 19 days faster and yet paid their suppliers 20 days slower”. From 2017 to 2018, the average payment duration of an outstanding invoice to small companies increased from 61 to 63 days, according to Atradius, a global credit insurer.
All of this is a significant cash drain for small businesses. “We are seeing more businesses that aren’t getting paid in the standard 30 to 60 days,” Rohit Arora, chief executive of Biz2Credit, which connects small businesses to lenders and assesses their creditworthiness, told USA Today.
So what to do? Look no further than our friends across the pond.
In the UK, there’s something called the “prompt payment code”. It’s a rule established by the government that, after recent changes, requires large corporations (those with more than 50 employees) to now pay their smaller suppliers within 30 days. The government there is requiring corporate directors and chief executives to personally sign the code.
The rule is voluntary, but companies that violate it are subject to public disclosure, a penalty that can be more devastating to a brand than a mere fine, particularly in these days of social media and internet outrage. Those who sign also agree to be charged for late payments.
Since its inception in 2008, more than 3,000 companies have signed on to the code. It’s not a perfect solution (officials estimate that about £23bn of late invoices are owed to businesses across Britain, according to the Financial Times), but it’s been helpful. “We are relieving some of the pressure on small business owners by introducing significant reforms to the UK payments regime – pushing big businesses to pay their suppliers on time,” said the UK’s small business minister.
So what about here in the US? I’m glad we are talking about the minimum wage but while we’re at it, how about also penalizing those same organizations that abuse their smallest customers with predatory and destructive payment practices? Perhaps our new leaders in Congress and the Small Business Administration might champion such an initiative. There’s already model to follow. Will big corporations comply, even if it’s voluntary like in the UK? I think they will. We’ve already seen the power of social media to amplify bad behavior.
Many large brands have already announced higher minimum wages for their hourly workers. Public opinion has pushed them into doing what’s right. But they still need to be pushed to do what’s right by way of their smallest customers too – and that means stop sitting on our cash and paying us on time.