Credit for cash flow

Tom Bengtson

It’s a big deal when any small business lands a big customer. Business owners dream of landing a Fortune 500 customer that will assure sales and boost profits. But of course, that’s not the end of the challenge. No small business owner wants to become dependent upon one big customer, so the ultimate goal is to land several big customers.

But many small business owners discover a new problem: Their big customer is a slow pay. Increasingly, big companies are demanding 60, 90 or even 120 days to pay their bills. They have the clout to make such demands, even though they continue to expect their customers to pay within a month. The mismatch gives many of these companies free working capital. That may be great news for the big company’s shareholders, but it’s bad news for bankers and really bad news for the small company suppliers caught in this kind of oppressive supply chain.

The trend toward longer payment cycles by big companies means these companies are getting credit from sources outside the banking system. This is lost business for banks. Banks are best positioned to respond to the credit needs of companies in their communities. It’s tough enough that banks have to compete with credit unions that make business loans; they shouldn’t have to compete with the small suppliers providing the services and widgets big companies need to make cars, tractors, refrigerators and countless other big-ticket items.

And many small businesses simply are not in a position to extend terms to 90 days or more because their own employees expect to be paid promptly. The working capital at many companies is too thin to support a team of employees for three months with no revenue coming in. Those companies have to borrow to keep things afloat, and some of them have such limited borrowing capacity that they get forced out of business or into a sale.  

A number of states have wage theft laws on the books which require employers to pay employees promptly. It doesn’t seem unreasonable to me that the benefit of those laws be extended to include suppliers to those employers.

If you have small companies in your trade area, consider making credit available that allows them to manage receivables from large companies that take more than a month to pay. This kind of credit can keep the small supplier in business. Landing a big customer should be a good thing for a small company, not the source of a cash flow disaster.