By Mazin A. Sbaiti – Baron & Budd Attorney
I recently submitted this post about how large companies have shifted to paying small business vendors on 90 day terms rather than 30 day terms. This is really interfering with the small businesses’ cash flows and even driving a few out of business because they can’t get short term loans (whereas the big companies can – it’s call TARP, and “commercial paper).
I wanted to follow that up with a few more thoughts I had and to dispel a couple of issues raised by colleagues and friends of mine in reaction to the post.
One person said: “increasing the expense on large companies could be the difference between large layoffs at a big company who is saving millions this way, and just a couple of layoffs if one or two small businesses founder.” Interesting! But I think it’s incorrect. Here’s why: it assumes that large companies are on the brink and that this is a last-ditch effort to stave off mass layoffs. Nothing suggests that that is the case. This is a widespread phenomenon, and generally, corporate profitability has been increasing, as have corporate bonuses to top executives. So it is not the case that generally, it is either pay late or fire 1000s of workers. I also question the veracity of this scenario because the businesses we’ve spoken to have not ever been approached by their vendors who needed to change the terms of the agreements they have (which typically say net 30 days). So there has been no good faith effort by the corporations to negotiate or come to a compromise with American small businesses as one would expect if a company finds itself in difficult times. No – it is far more likely that, as we’ve seen before, corporate greed has taken over and the little guy is going to pay for it. Americans hate when a party to a contract breaks the contract, which these companies are doing – they are getting “free money” which is almost the same as stealing.
A good friend suggested that there may not always be contract terms written out and so there is no breach. Again, a good point, but I doubt that is true overall. Here’s why: according to several sources, many anecdotal, but others more official including the SBA who advocates for small businesses, corporations were generally paying net 30 days before, and now they’ve shifted. This has two implications – 1) as widespread a practice this appears to have been and appears to be, it is unlikely that payment was being made without some kind of term commanding payment net-30 days; and 2) even if that isn’t true; if the written agreements are silent as to when to expect payment, and the course of conduct and course of performance was that the corporations were paying on net 30, then that is now arguably part of the specific terms of the contract and is also an industry standard on which there has been reliance and acceptance.
In my last post I somewhat shrugged off the idea that States’ Attorneys General would band together to stop this because it was a political question. Upon reflection, I really think that if the people running their states are serious about turning the economy around, isn’t this a great way to do that? In other words, small businesses are the real drivers of our economy; they hire 90% of our workers. But if this phenomena is having such an adverse effect on the certainty that small businesses need in their future cash flows to be able to hire and grow their businesses, isn’t this something that really needs to be nipped right away? One would think so…