How Firms Cope With Slow Payers
- Nov 15, 2011
Small companies need the business. But they also can't afford to be too lenient.
By EMILY MALTBY
[HELP] Jason Schneider
Call it a cash-crunch contagion.
One business owner falls behind on paying suppliers. Those business owners then fall behind on paying their own suppliers. And so the delinquencies spread.
The causes are all too familiar—sluggish consumer spending, tightened capital markets and overall economic uncertainty. And the consequences are afflicting countless businesses across the country.
Owners are finding it harder than ever to collect payments, making it difficult to manage their own debts. Many are torn between imposing tough terms on their customers, and letting them slide out of sympathy.
As hard as businesses are being squeezed now, the long-term effects could be more severe. Experts say the longer the problem persists, the harder it could be for owners to repair their credit, maintain strong business relationships and, ultimately, grow.
"It is a huge problem," says Gerri Detweiler, co-founder of BusinessCreditSuccess.com, a credit-information website. "Many businesses are bare bones now and can't cut expenses. They don't have the lines of credit they used to have. They're pushing those bills as long as possible."
Just how bad has it gotten? Firms with between one and four employees were on average 8.2 days late paying bills in the three months ended Sept. 30—about a 15% jump from a year earlier, according to the latest quarterly Business Benchmark Report by Experian PLC. Firms that had five to nine employees were 7.6 days late, up 16%. The average for businesses of all sizes was 7.1 days.
What's worse, 12.3% of debt among the smallest firms was considered severely delinquent, or more than 90 days outstanding, up from 9.8% last year. Similarly, 9.7% of debt was severely delinquent at firms with five to nine employees, compared with 8.6% last year.
Many businesses have seen their worst payers struggle to the point of shuttering. "So, instead of slow payments, it's no payments," says Michelle Dunn, a collections consultant and author in Plymouth, N.H. "They need the remaining customers to pay sooner than before. And they're not."
Terry Croom, who runs BizCon Group LLC, a business-services firm in Greensboro, N.C., estimates that "as much as 50%" of his customers, who are also small businesses, are behind on paying. In total, he's waiting on some $20,000, he says.
"It really does have a ripple effect," says Mr. Croom, who's had to dip into personal savings to keep cash flowing. "We haven't fallen behind on our payments yet, but the projection is it's going to happen."
And the delayed payments are thwarting his ability to launch new products, hire and market the company's services, he says.
Mr. Croom faces a common problem: He doesn't want to be too demanding with customers because he needs their business. "We understand what businesses are going through," he says.
But that philosophy can get small firms into hot water. "I know it's hard, but you have to remember you are in business to make money," says Ms. Dunn.
Taking a firm stance is a better strategy, she says, by confronting customers who are past due and asking for payment, no matter how uncomfortable the conversation may be. And if the customer can't pay up, Ms. Dunn says, it's important to keep the conversation going until both sides arrive at a solution, such as a payment-installment plan. The terms of a contract could also be revised to include an upfront deposit on future orders or a discount for early payment.
Tadd Rosenfeld, chief executive of Dual Eagle LLC in Miami, took a hard line last year after his marketing firm noticed increasing delinquencies. To speed up payments, he asked his clients to pay with credit cards. Any new clients that didn't want to use cards would incur a $1,000 start-up fee.
All but a few customers are now paying with plastic, which means Dual Eagle gets paid as soon as the credit-card transactions clear. "That did wonders to our cash flow," Mr. Rosenfeld says. "We moved it easily six weeks earlier."
Meanwhile, to make sure his own payments didn't get backed up, Mr. Rosenfeld says he negotiated extended payment terms with his own suppliers.
'We Just Walked Away'
Other businesses have taken an even firmer stance. Gary Jacobs, president of Hydro Pump Co. in Omaha, Neb., tells customers he will report them to credit bureaus when bills are past 90 days due. At that point, he says, some pay. When that doesn't work, he turns to a collections agency—and rarely has had to write off the debt, he says.
"We just walked away from those that didn't pay bills on time," Mr. Jacobs says. "There's no sense in wasting time with contractors that don't pay bills."
The firm, which distributes geothermal and water-well products and deals mostly with contractors, faced particular challenges when the housing slump hit. Today, Mr. Jacobs is diligent about asking for credit applications and a personal guarantee before signing on contractors.
Upfront credit checks can save business owners plenty of headaches, says Ms. Detweiler of BusinessCreditSuccess.com.
"Find out what's going on to understand the risk you are taking," she says. "You can fool yourself to think you are making money, but then end up losing it with the time and cost of collection efforts."
Ms. Maltby is a small-business reporter in The Wall Street Journal's New York bureau. She can be reached at firstname.lastname@example.org.
Category: General Business