US SMEs Owed $825B — Here’s How They Can Cope

The problem of late supplier payments has been drilled into the collective minds of SMEs and corporate buyers for years now. But invoicing financing company Fundbox has released a new angle on the impact late payments have on the U.S. economy.

The value of funds tied up in unpaid SME invoices is equivalent to 5 percent of the national GDP — that’s $825 billion — according to Fundbox statistics released this week.

So, PYMNTS wanted to know what the economic impact would be if companies suddenly began paying their small businesses on time.

“I think it would create a more stable SMB economy, which is a huge driver of the overall U.S. GDP on an annual basis,” stated Fundbox VP of Marketing Jordan MacAvoy in a recent interview with PYMNTS. He added that there would probably be a lot more investment going on within the SME community.

“They’d have the ability to invest back into their business, whether it be buying new equipment or materials, hiring that next employee, investing in a marketing or advertising campaign to bring new customers through the door,” the executive said. “These are all the types of things that they could invest in.”

Small businesses could be able to run a smoother operation, and with more companies paying suppliers faster, it would make the threat of a less-frequent late payment easier to bare.

Unfortunately, as is made so clear in Fundbox’s latest report, the problem of late payments is very real and not likely to go away anytime soon.

“The issue with late payments of invoices has put a huge tax on small businesses,” MacAvoy added. “It’s a very significant burden they face.”

Fundbox’s research found that 81 percent of outstanding small business invoices in the country are at least 30 days past due. On average, it takes a small business three weeks to get paid, a timeframe that expands depending on the industry. For instance, wholesale traders wait 30 days to get paid, as do players in the mining, quarrying, oil and gas extraction industry.

That’s despite the fact that small businesses have an average of 27 days of cash reserves, making for a tight squeeze in cash flow management. Each SME in the U.S. holds an average of $84,000 in funds not yet paid, with some industries waiting on as much as $163,000 in unpaid invoices.

It’s a problem for SMEs across the globe, with different markets tackling the issue in different ways. Regulators in the U.K. and Australia, for instance, are taking a legislative approach to ensuring SMEs get paid faster. MacAvoy told PYMNTS that he and Fundbox would probably support any legal efforts in the U.S. to do the same.

“I think, to a certain degree, those are the things that we would advocate for,” he said.

U.S. regulators, however, haven’t been as aggressive on the topic. But there are federal efforts underway that could, potentially, impact the speed with which companies pay their suppliers. Take the real-time and faster payments initiatives, for example. MacAvoy said these technologies may offer a few days off of the typical B2B payments timescale.

“There are lots of great technologies out there that help with making sure businesses are processing invoices more quickly,” he said. “Electronic payments, once an invoice is approved to get paid, are a great way to reduce, by a week or so, the time it takes small businesses to get paid, as opposed to something that goes through paper mail.”

Initiatives involving faster and digital payments can make the entire B2B payments process — from sourcing, to purchasing, to purchase order and invoicing, to processing and finally payment and reconciliation — a bit faster by cutting down the time it takes to complete each step.

But the broader issue at play here, MacAvoy said, is the tradition of standardized payment terms. Often, they’re net 30 or net 60 days but can reach as high as 120 days or longer. This isn’t always a bad thing, however.

“It gives large corporations and smaller businesses the flexibility to have standardized ways that they take care of invoicing,” he explained. The predictability of always receiving payments on a 30- or 60-day basis can help companies manage cash flow and ensure invoices are managed efficiently, as opposed to managed on a one-off basis, MacAvoy added. Indeed, those extended payment terms are key to Fundbox’s business, as a company that offers SMEs the working capital they need while they wait to get paid. But those terms don’t have to reach into triple-digit days for invoice financing companies to be successful, and MacAvoy said introducing efficiencies through electronic payments and automation can shorten B2B payment term lengths at various parts of the payment process.

“Outside of having extended payment terms, we see tremendous opportunity with adding areas of efficiency,” he said. “We think SMEs should be adopting those.”