SMALL BUSINESSES SPEAK OUT, CONT’D…. Last week, Jeffrey Leonard, CEO of the Global Environmental Fund, talked to Stephen Colbert about his article in the latest issue of the Washington Monthly. The appearance generated some interesting responses.
If you missed the interview (and the article), Leonard is shining a light on a serious problem small businesses face, but which hasn’t generated much in the way of attention: “Many small firms are handicapped by a new twist on an old parasitic business practice that large corporations are using in the wake of the 2008-09 financial crisis, one that has significantly reduced the cash available to small businesses to invest and hire new employees.”
Leonard has several proposed changes, but the most straightforward is also the most effective: require companies with federal contracts pay their suppliers within 30 days of invoice. The shift would not only improve small business cash-flow, but would also help expand hiring.
After the interview, we heard from more than a few small businesses that could directly relate to what Leonard described. We started publishing some of their responses Tuesday, and we’re keeping the series going today.
Here, for example, is a note we received from Orlando.
First my congratulations on a well written article on the subject of payment delays. Second, despite Mr. Colbert’s success with his contrarian approach to guest interviews, your interview was one where I thought you had a right to what? Throttle him?
The point that you were making on remittance deferrals is one that I have seen expanding for more than a decade. As a bank auditor I have had many occasions to see the financial crisis for individual small businesses supplying large companies and this practice has been blatantly obvious. The number of times that small suppliers have been borrowing working capital to carry the large business has been growing at an ever increasing rate as you pointed out. At the same time your observation on the growth of consultant advice to use this tactic has become deplorable. When a consultant is offering advice on how to maximize profits, the withholding of contractual payments is low hanging fruit. Since many of these advisors are paid on a ‘percentage of savings or profit gain’ basis, they are motivated to propose this ploy to enhance their own revenue.
The fact that an advisor offers it and it is followed by implementation of the concept by the client forms a double dip of amorality (“a” versus ‘im’ is a purposeful choice.). Both the advisor and the obligated purchaser are – to state it plainly – stealing and reveling in the fact that they are doing it BECAUSE THEY CAN.
Small business owners should adopt a cardinal control rule that NO customer should command more than 25 to 33% of his/her revenue stream. This is a hard rule to live with but at levels above 50% the customer gains control of the supplier’s company and the terms of all contracts become moot. The supplier should be in a position to severe the relationship and walk away at his/her will without completely tanking the company.
The supplier should watch the degree to which his/her customer relies on that supplier as a sole source. Admittedly, the customer can find another supplier (gullible soul) in this country or overseas in due time. However, if there is a sole supplier arrangement and the immediate cessation of that source will disrupt production at the customer, the supplier has some leverage to gain payment up to date – at the risk of losing future business, yes, but it beats bankruptcy.
One more thought, insist that all contracts with large companies will be enforceable in the jurisdiction of the small business supplier. There is nothing like having your neighbors at your back in a courtroom. I’ve seen that stimulation more than once reverse entirely the conversation about legal threat coming from the ‘big guy’ and foreclose the concern about legal action.
There was also this note from Henderson, Nevada.
I accidentally caught your 2/17/2011 appearance on Colbert Report.
10 years ago I was involved in a federal court case over the EXACT issue you are trying to bring to Washington’s attention today. In short a multi-billion dollar public company put me out of business by not paying invoices when due, even though they had agreed IN WRITING to pay on Net 60 terms. Through depositions, I learned that their “real terms” were “Net Never” and I was just their latest victim.
I discovered another angle to the schemes of big businesses that you may not be aware of. Aside from making a profit on the float, some big businesses are intentionally forcing small businesses into situations that allow the big business to obtain goods for a fraction of their real value. In this instance, Wal-Mart may be the #1 player in this scheme.
We also received this note, emphasizing the fact that state governments can be part of the same problem.
Mr. Leonard I just saw u on Cobert I wanted to inform u that state governments r doing the same thing u r accusing big business of doing. Trying to get paid by the state of New York is a nightmare. Thanks.