Jan. 21 (Bloomberg) -- We all know that small business is the engine of the U.S. economy. It accounts for almost two-thirds of all jobs created in the past decade.
But nowadays small business is recovering more slowly than big business. While capital spending at small firms is up, according to a PNC Bank survey, 60 percent of small-business owners are delaying hiring. Why? I’ll defer to the economists on the complex explanations but one simple one has been overlooked: corporate deadbeats.
In their B2B relations, big businesses are forcing small businesses to act as their banks by not paying their bills on time. “Net 60” is the increasingly common standard in big business -- 60 days before cutting a check to suppliers. You can imagine the havoc this wreaks on the cash flow of the small fry that depend on large companies to stay alive. It’s an outrageous and destructive trend in the business world.
Fortunately, President Barack Obama has the power to stop much of it if he’s tough enough. Both the Small Business Administration and the National Federation of Independent Business have been slow to catalogue the extent of the problem. But Washington Monthly magazine recently surveyed Inc. 500 businesses and found this abusive practice is spreading.
Cisco Systems Inc., for instance, announced last year that effective last May it was applying a “Net 60” policy toward all of its suppliers. Is Cisco still ailing, as it was a few years ago? Hardly. The company’s earnings per share rose 27 percent in the last fiscal year and it had $39.9 billion in cash and equivalents on hand.
Cisco knew when it made the announcement that it might cause some hard feelings. After all, it was telling the world that it planned to hold on to invoices for two months rather than paying its bills on time. So the company explained that it was simply implementing “new payment terms” that had been “benchmarked against our technology peers.” This is like breaking into your child’s piggy bank, taking the money from someone dependent on you, and explaining that “all of my adult peers are doing it.”
Lest you think such behavior is reserved for the technology sector, consider the case of Anheuser-Busch InBev NV, the Belgian company that is the world’s largest brewer. Net 60 is too wimpy for these folks. They routinely stiff their advertising agencies and other vendors for four months: Net 120.
Not surprisingly, AB InBev isn’t run by charming brewers with an appreciation of the fine human beings in their industry. It’s run by “ruthless, machete-wielding investment bankers,” as Ann Gilpin, an analyst at Chicago-based Morningstar Inc., told Advertising Age trade magazine. They don’t know foam, but they sure know float.
Naturally, the victims of this predatory behavior can’t complain publicly because they are dependent on the contracts for their own survival. So we have a situation where big players in an industry force their supply chains to finance their business, but there’s no one to call them on it.
The consequences of this for hiring aren’t hard to figure. While large corporations are sitting on an estimated $2 trillion of idle capital, small firms are trying to calculate whether they can hire new employees when they aren’t getting paid for two, three, four months at a time.
The author of the Washington Monthly story, Jeffrey Leonard, offers an ingenuous way for Obama to address the problem in his State of the Union address on Jan. 25. First, Obama could draw attention to “an unfair business practice” and ask the SBA to determine exactly how widespread it is. Then, after appropriate study, he could issue an executive order requiring that any company with a federal contract pay suppliers within 30 days.
This might seem like a harsh remedy -- more strong-arm regulation from Washington. Obama just finished telling American business that over-regulation is a problem. Wouldn’t such an executive order fly in the face of the president’s new pro-small business initiative? Actually, small business would stand up and cheer if Obama took this action. He could sell it as a move to align payment schedules. The current standard for the government itself is Net 30: All bills are to be paid by the Treasury to federal contractors in 30 days. Why shouldn’t corporations be held to the same payment terms they enjoy from the federal government?
Not only would such an executive order cost taxpayers nothing, it would have no compulsory component, and thereby not truly qualify as a regulation. If companies didn’t want to be held to Net 30, they could simply stop doing business with the federal government. Of course, almost all major companies nowadays do at least some business with Washington. That would mean most would decide to clean up their act. Some big businesses might go the full hypocrisy route and charge that the government was using its leverage or extorting them in some fashion. That would be rich.
Of course such a policy change would need to be studied and implemented carefully. There are always special cases. A process could be established whereby large firms experiencing severe financial problems could file for a waiver and extend their payment terms without losing their federal contracts.
The politics of this are refreshingly simple. Because executive orders are unilateral, Obama wouldn’t have to worry about the approval of Congress. Besides, announcing such a move in his State of the Union address would cause cheering. Every member of Congress claims to be looking out for small business. For the president himself, this is a no-brainer politically. If he can win the approval of the small-business community, many of whom are independent swing voters, his chance of re-election will brighten considerably.
But most of all, it’s the right thing to do. It’s about time big companies stopped using small, vulnerable firms as their piggy banks. Who could deny that this would help put America back to work again?
(Jonathan Alter is a national correspondent for Newsweek and author of “The Promise: President Obama, Year One.” The views expressed are his own.)
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