Slow-Paying Customers Causing a Cash-Flow Crisis For Small Businesses

Apr 11, 2011

Bloomberg BusinessWeek small business reporter John Tozzi wrote recently about cash flow problems facing companies who are getting paid later by customers and have had their credit lines scaled back or cut off completely.

“Small businesses face what could be a permanent legacy of the recession: Their vendors are demanding faster payment even as their customers take longer to pay,” Tozzi wrote. “That means companies with the least clout get squeezed the hardest.”

Tozzi interviewed a custom cabinet seller that closed its doors last August despite seeing sales rise 26 percent over the previous years because the company was unable to pay its bills due to late payments from customers and tougher terms from lenders.

“[The custom cabinet seller] says many of his customers had slowed their payments from 30 days to 60 or 90,” Tozzi wrote. “At the same time, the cabinet manufacturers he ordered from cut his credit lines or required deposits, which tied up $60,000 to $120,000 per month. Although [he] says he was current on his loans, his lender pulled his credit last March, saying his assets had dropped below the level required by the loan agreement.”

Research has found the average time it takes for a business to be paid by its customers has increased, Tozzi reported.

Sageworks, an accounting software maker that analyzes private company financial statements, found that the average time private companies took to collect accounts receivable increased to some 27 days in 2010 from about 23 days in the previous four years. Experts Tozzi spoke with say longer payment terms are now the new normal.

To read the complete Bloomberg BusinessWeek article, click here.