Why Small Companies Are Taking Longer to Pay
By Carol Tice, June 27, 2011
Small business owners are taking longer to pay their bills.
Five major industries are seeing their average accounts-payable days rising, according to a new study from the Raleigh-based small-business research firm Sageworks. Taking an average 40 days to make a payment, manufacturing firms are delaying the most, while real-estate businesses, which were at 10 days in 2009, are now at nearly 20 days. For retailers, it took 24 days to pay last year, but now it's more like 34 days.
Although the latest survey of small-business economic trends from the National Federation of Independent Business showed growing pessimism among entrepreneurs, the explanation that hard times are causing companies' accounts payables to creep might not be entirely accurate.
So what's behind the uptick in accounts-payable days? And is this trend good news or bad? Here are a few theories on what could be driving longer payment cycles:
Client payment slowdown. Major corporations that have small businesses as subcontractors are paying slower. Giant companies are sitting on a big wad of cash right now, and they're not letting go of it easily. If clients take longer to pay, small businesses, which often function check to check, tend to pay their vendors slowly, too.
Poor cash management. Many entrepreneurs are loath to call deadbeats or revoke credit when customers don't pay their bills on time. Not only do few small businesses have policies for dealing with problematic payers, small-business owners will often make credit decisions on the fly rather than research customers' credit histories to judge if they're a good risk. They may also be holding too much inventory, which depresses available capital.
Downturn chaos. With the recovery not really materializing, many business owners are scrambling just to keep the doors open. One side effect of that can often be disorganized billing procedures. When businesses don't bill promptly, they don't get paid promptly either, and then they're jammed up when their own bills are due.
Better credit terms. Of course, it may also be that some entrepreneurs have been able to negotiate longer payment terms with their vendors because business is picking up and they're ordering more volume. Not every company is still suffering. Perhaps some businesses are paying later simply because they don't have to pay sooner anymore.