By Mazin A. Sbaiti – Baron & Budd Attorney

One of the most recent assaults on small business’s vitality in America is the shift by large companies – often the customers of smaller businesses – from paying invoices 30 day net to paying them 90 day net.   Several recent studies have shown that this is crushing small businesses by disrupting their cash flows.   This is just the newest way large corporations are managing their own cash flows and cash availability (or even just earning a small percentage extra without any risk).

In other words, corporations are basically taking out 90 day interest free loans from their small business vendors.  As if TARP wasn’t enough, small businesses are now financing corporate America against their will!  Large corporations used to take out short term loans (90 days roughly) called “commercial paper”.  If you’ll recall, this market shrank precipitously during the recession but is still how most large companies satisfy their short term cash needs.  Even though interest rates are very low for commercial paper, the interest these large corporations have to pay on their “loans” from small businesses is zero.  The math is simple:  an extra 1/4% on $20 billion in transactions equates to a lot of money that can be paid out in bonuses to the CEO and top executives.  All on the backs of American small businesses.

These large companies are more likely than not in breach of their contracts with their providers.  But so what?  Who is going to sue such a large customer?  Not many small businesses can afford to “fire” their largest customers.  And small businesses lack the market power to, say, demand pre-payment or earlier payment.   A huge corporation usually chooses their vendors based upon a variety of factors such as price, quality, and reliability; but is not usually beholden to any one product or service provider and can simply shift their demand to someone else who is willing to put up with the breach, or waive it altogether.

What is the answer?  In England, the government long-ago passed the Late Payment of Commercial Debts (Interest) Act 1998, which gave small firms with 50 or less employees a statutory right to interest for the late payment of commercial debts.  Here in the U.S., the so-called “pro-business” U.S. Congress has never even considered something like that to protect 90% of American businesses who need it.

Lawsuits may work.  A class action or mass action on behalf of every small business that a large company does business with and who has the 30-day net payment is probably doable under the right circumstances.  A businessperson who loses their business because of this practice will have a tough time being part of a class, and an equally tough time trying to prove the full extent of damages.  A class action would likely be limited to collecting a fair amount of interest (for breach of contract under most states’ laws) and more importantly, to seek injunctive relief to stop large companies from continuing this practice.  This is especially so because there is power in numbers.  Another option is for the States’ Attorneys General to get together and go after the large companies on behalf of small businesses in their respective states and at least seek injunctive relief.  Although that is a political question – not necessarily a legal one.