Paying small suppliers late leads to a cash crunch and stressed-out entrepreneurs. But new data provides quantitative evidence behind the anecdotes of squeezed small businesses in the U.S.
Reports from Associated Press last week put faces on the struggle of late small business payments. SMEs like New Hampshire-based TSR Hockey told reporters they’re waiting two or three months to get paid from their corporate clients, up from a previous one-month wait just a year ago.
Another small business, a PR firm based in California, told reporters that, while some corporate customers had paid “like clockwork,” they will now all of a sudden take up to 45 days to pay their invoices — often without a reason.
But those small businesses are now getting support to back up their stories of cash flow struggles.
The PAYDEX index, for example, dropped 3 percent in the first half of 2016 compared to the second half of 2015. The index, which is generated by Dun & Bradstreet Credibility Corp., scores businesses on their ability to pay on-time. The decline in the index means companies are taking longer to settle their outstanding invoices, reports explained.
Days after AP’s story was circulated, reports emerged from the MIT Sloan School of Management and The Harvard Business School that provides new evidence that faster payments can help small businesses.
The data offers proof that just a few days can have a serious impact on small firms when they wait to get paid.
According to researchers, accelerating payments to small business government contractors by just 15 days is directly correlated with the growth of that small business.
“On average, each accelerated dollar of payment led to an almost $0.10 increase in payroll, with two-thirds of the increase coming from new hires and the balance from increased earnings per worker,” analysts said in their announcement of the results of their research.
The MIT Sloan School of Management and The Harvard Business School conducted a study to examine the impact of new rules, which came into effect in 2011, dubbed “QuickPay” rules. Those guidelines accelerated payments to SME government contractors by 15 days, leading to a value of about $64 billion worth of contracts every year, reports said.
“The direct effect of the policy was to increase annual payroll by $6 billion and to create just over 75,000 jobs over the three years following the reform,” researchers concluded.
According to AP, nationwide economic challenges may be to blame, at least partially, for a slowdown in B2B payments, as businesses are forced to prioritize which of their invoices to settle first.
Accepting credit cards and other forms of electronic payments, while they impose a fee on businesses, enables companies to receive payment more quickly, reports pointed out. But some paying companies are deliberately slowing down payments to strategically boost their own cash flow.
“They got in the habit of extending payment times as a matter of policy,” said Mary Driscoll, a researcher at APQC, in an interview with AP, discussing why companies are slowing down their payment cycles.
But those delayed payments have a direct effect on small businesses’ ability to make their own payments on-time, like payroll and rent. And while some companies may enjoy the extra time they take to settle their invoices, the report from the MIT Sloan School of Management and The Harvard Business School concluded that these delayed payments are impacting a small business’ ability to grow.
“We are very excited about this research because this is the first time an acceleration in cash collection has been shown to have an effect on hiring in the all-important sector of small businesses,” said Jean-Noel Barrot, associate professor of finance at the Sloan School, in a statement.
According to researchers, however, the report found only “very limited” benefits of accelerated payments to SMEs in markets without high unemployment rates.
But according to PK Boston attorney Robert Pellegrini in an interview with AP, accepting payments late can be dangerous for any business.
“Many small business owners are afraid to collect for fear of upsetting a long-term client, but continuing the work without being paid sets a dangerous precedent that will ensure you will never be paid on time,” he said.