Thursday, March 11, 2010

The Perversity of the Possible

On Tuesday of this week a national association that tracks the conditions and sentiment of smaller businesses reported that the net percentage of small business owners whose outlook on the economy was positive had fallen from +2% in December, to +1% in January to a -9% in February.

An 11% net sentiment swing in three months is substantial.

On the other hand, this morning’s Wall Street Journal, on its front page, reported on the surprisingly strong rebound in the market for corporate debt. Large bond issues have been getting a surprisingly strong reception in the institutional market, reflecting an improvement in perceived business conditions and a corresponding reduction in risk.

So the small businesses are seeing increasingly cloudy skies while the big ones are enjoying more and more sunshine (pardon the imagery: I’m going to Miami for the week-end!).

Only a very few will have read a piece of news I found quite interesting on Wednesday; the day between these two much more widely-circulated reports.

On Wednesday a TRE Seller posted an auction of invoices that carried an unusually long days-to-pay number; almost triple the usual terms between that Seller and its Account Debtor.

Obviously anticipating Buyers’ questioning the terms, the Seller posted a letter explaining that its Account Debtor had, apparently unilaterally, notified its suppliers that it was only going to pay its bills once every three months. So the bills submitted early in it's 90-day cycle would take a long time to get paid.

That’s hardly the first time I’ve heard or read of such heavy-handed treatment of smaller businesses recently.

In two cases involving businesses that are among the largest in the nation I have recently heard of: a) a blanket imposition of 90 day terms, and b) a selective but significant imposition of 120 day terms.

I cannot say with certainty that there has been no opportunity for price adjustment in these cases but it is my understanding that there has not.

These larger companies are climbing out of the recession, in part, on the backs of their smaller suppliers. They are extending payment terms because they CAN.

So why do I use the term “perversity” in the title of this post?

Because squeezing the profit margins of the smaller businesses by forcing them to either reduce their production volume due to lack of working capital or to increase their costs in order to pay for financing, has a direct impact on their ability to grow and generate new jobs.

It is well documented that the bulk of job growth, particularly in the early stages of a recovery, comes from the small business sector. It is that job growth that generates the end-user demand for the goods and services of those large companies whose outlook is now relatively rosy. Without the job growth, their prospects dim.

So–perversely—the larger companies that are using their purchasing power to extend payment terms to UNUSUAL or UNANTICIPATED levels are, at least in aggregate, acting against their own long-run best interests. (Normal and expected payment durations are assumed to be built into the suppliers business models.)

I found myself wondering what this Seller would have done if it had received such a notice from a major customer and NOT been able to post the invoices for sale on TRE.

It will certainly cost more to preserve their cash flow velocity now, but if they had no way to compensate for the slower payments, their only option might have been to throttle back their production and reduce their staffing, taking more potential consumers out of the market for their Debtor’s product!

The possible CAN be perverse!


  1. Hey Chuck -

    You are right on the mark. I am seeing the same tension from the trade creditor's perspective.

    The first thing they should do when a large buyer unilaterally changes terms is to renegotiate the price, but if the customer can source the product elsewhere, they have little leverage to do so.

    They can also report the customer as past due to the credit rating agencies, but large firms don't seem to care - somebody will sell to them anyway.

    Maybe we should create a forum for distributing 'ethical ratings' on large corporations. Maybe that would catch somebody's attention

  2. Thanks Dave,

    I've suggested to the reporter who wrote the WSJ piece referred to in my post that they research this issue and do a major article on the impact of large companies unilaterally extending payment terms. I haven't heard back from him yet but I'll follow up. When I tell people about what's going on in some of these situations they are both surprised and angry.

    Thanks for your comment!