Here’s good news for business owners accustomed to waiting months for corporate customers to pay their bills: 26 companies, including Apple, FedEx, and Johnson & Johnson, pledged to pay Main Street suppliers more quickly in a deal announced by the White House today.
The initiative, which the White House is calling SupplierPay, can mean a lot to small businesses. The amount of time it takes for an auto-parts maker or a catering company to get paid determines how quickly they can take on the next big job—or when they can add workers or new equipment. Getting paid sooner may also mean the business owner doesn’t have to take costly financing to bridge the gap.
Payment times stretched out during the recession and never bounced back completely. It’s a headache for big corporate finance departments but it can be traumatic for small businesses. They don’t have much leverage over large customers to speed up payments and often can’t afford to walk away from a big job, even if they know it will take months to collect. Small businesses’ borrowing costs are higher, too.
“Waiting for payment on a service or product already delivered can put these businesses in economic hardship,” says Joe Hyland, chief marketing officer at Taulia, which helps corporations and suppliers negotiate discounts tied to faster payments. The median of 409 companies in the Standard & Poor’s 500-stock index that reported data paid suppliers in 46.5 days in 2013, according to Bloomberg. Small businesses wait even longer to get paid on a corporate account—about two months on average, Hyland says.
Measuring what those late payments cost Main Street isn’t an exact science. A previous White House initiative to get federal agencies to pay small contractors more quickly has saved “well over $1 billion” since 2011, the White House says, though the administration doesn’t detail where those savings come from.
How much do slow payments cost? One way to find out is to look at the rates charged by factoring firms, which purchase unpaid invoices for a discount. That gives businesses cash faster—just less than the amount they’re owed. BlueVine, a Silicon Valley startup hoping to modernize the 4,000-year-old factoring business, will buy a $10,000 invoice due in eight weeks for $9,200, and a four-week invoice for $9,600, according to a calculator on its website. In either case, that’s more than the business would pay for a bank loan.