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Jeffrey Leonard
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Last night's episode of The Colbert Report was a rare episode in which I actually watched the guest interview because (for once) the discussion was about a national economic issue that may have actually affected me directly. Last night's guest was Jeffry Leonard of The Washington Monthly, who recently wrote an article about the increasing amount of large corporations who are essentially stiffing thier small business partners when it comes time to pay the bill. Many large corporations are switching to the "net-60-plus" system of paying debts, in which they will pay off small companies that they hire in 60 or 120 days after the invoice is filed instead of the 30 days that has been standard since the beginning of time (that's an exaggeration - mostly).

Companies are supposedly doing this because a.) the longer they hold onto their money without paying their debts, the longer they can gain interest on that money; and b.) nobody has stepped up and said "No, you can't do that".

The problem with this policy is that small businesses are often dependant on being paid within a month because they need to pay off the costs of the supplies and materials for the work they've done immediately, and still have to meet payroll at the end of the month (or every two weeks, as the case may be). Some companies can't afford to go two whole months without being paid for services rendered, and this is one of the reasons that small businesses are not hiring despite the economy being on the rebound. And one of the reasons that individuals are not spending as much money as they could: they don't know if they'll get a pay check on time this month, and they've got bills too!

I happen to work for a small service-based software and consulting company, and we have actually had several instances in the past few months in which a large company that we have done billable service work for has paid us late by a matter of weeks or a whole month. Doing so has caused us to miss payroll several times, and my coworkers and I have had to wait a week or longer to get our paychecks past our usual pay day because the money we get from our clients on a monthly basis makes the difference between us being able to fulfill payroll or not.

Now, I don't know for sure that the delays in invoice payment are a result of our clients shifting towards "net-60" payment plans. They could very well have legitimate reasons for the delays in their check delivery. That's why I said "may have affected me directly".

But regardless of whether my company's clients are guilty of this "crime" or not, the fact remains that there needs to be some sort of oversight for this sort of selfish behavior by large corporations. Small businesses need a watchdog looking out for them. And unfortunately for "small government" supporters, it looks like government intervention is going to be the only way that this problem can be fixed.

Unless we want to rely on the kindness and generosity of multi-billion dollar corporations...

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Comments (1) -

02/21/2011 05:04:10 #

I think you were correct, the Net-30 policy has been the standard since the beginning of time (well, since prostitution probably).  I think some large companies have always purposely paid late.  I once worked accounts billable at a small company, where it the largest client always paid anywhere between 90-180 days later (as well as a few  smaller clients too but those didn't have as much of an effect). The owner didn't want to drop them because they did provide about 40% of the revenue even though it was always late.  In the end, the small company allowing the large client to do this cost it over $200k when that client declared bankruptcy and didn't pay the last 5-6 months of invoices.  Unfortunately for this small company, that wasn't the last time a client did that to them. [NOTE: this small company is now out of business].

It is sad but not surprising that this is now the majority trend with large corporations.  Small businesses often have cash flow problems and can not stand to loose their biggest customers so they will allow these large companies to continue to screw them.  If only all small businesses could afford to and were motivated to ban together and refuse service to all these large corporations once their invoices go over 30 days, perhaps the large corporations would be forced to revise their policies.

I don't know how the government would regulate this across the board, but I agree with the guest, Jeoffrey Leonard, that it could at least make it a requirement in government contracts that awardees submit to a monthly audit and must pay all contractors within 30 days. The consequence of not doing so could be huge fines for perhaps the first offense(s) and then eventually after so many offenses (maybe 3 offenses), the punishment would include the loss of the contract plus monetary penalties for breach of contract AND ineligibility for government contracts for X number of years (perhaps 5-10 years).  Also, there could be an alternative to exactly 30 days payment, it could be either (1) 30 days or (2) if they pay between 30-60 days, they must pay an extra 3% or 4% of the contractor invoice. Outside of the 60 days could then trigger the fines and penalties.  While this would not help regulate on companies that do not have government contracts, it would still help a lot.

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