Editor’s note: The following is an open letter to large corporations and government agencies, imploring them to immediately pay their outstanding invoices owed to their small business vendors—as a swift way to help small businesses suffering from income loss due to the coronavirus. It’s written by Marten Abrahamsen, CFO at Fundbox.
Much has been written in recent days about the plight of small businesses, and their quickly diminishing cash while they wait for stimulus dollars. By some estimates, anywhere from 37–50 percent of small businesses have one month or less of cash on hand. In a world where the coronavirus has forced entire countries to shelter in place, businesses—especially those that trade in face-to-face transactions—have slowed to a halt.
In the U.S., the slowdown has had a ripple effect on the network of businesses that serve small businesses and has caused them to focus their attention on the CARES Act. Indeed, some of these service providers have entirely rewritten their roadmaps to help their customers apply (and get approved for) Small Business Administration (SBA) loans and U.S. Treasury funding, in an effort to help them get a piece of the stimulus before it runs out.
But before we bank our futures on the federal government moving quickly, we should look at a problem that has been plaguing small businesses for decades, and is, in fact, larger in dollar value than the stimulus: slow payments.
In 2019 Fundbox collaborated with PYMNTS and surveyed over 1,000 people in the U.S. who worked at companies of varying sizes, from solopreneurs to executives at enterprises. We learned that in the U.S. alone, there were $3.1 trillion in B2B receivables owed at any given time. When we removed the substantial portion owed to enterprises, we were still left with an enormous sum owed to B2B small businesses: $900 billion.
Small businesses are waiting to get paid for almost a trillion dollars in receivables, right now.
We call this phenomenon the Net Terms Economy. It is the informal credit, often called net terms or trade credit, that businesses lend to each other, not issued or tracked by banks or even the Federal Reserve. Both parties in a transaction are incentivized to operate this way. The buyer wants extra time to pay, to stretch their payables. The seller wants to stay attractive in a competitive marketplace and close the deal. The result is terms where the seller gives the buyer 30 or 60 days, or sometimes longer to pay them.
The Net Terms Economy problem is exacerbated in an economic downturn where buyers want to stretch their payables even further. I’ve read no fewer than three articles in the past two weeks encouraging businesses to preserve their cash so they can outlast the coronavirus. That’s fine if you owe a huge enterprise with enough cash reserves to last them months, if not years. But to small businesses, it could mean the difference of staying in businesses or closing shop.
That’s why Fundbox has partnered with several other companies that serve small businesses, such as Alignable, Womply, Gusto, and Business.com, and started the #paytoday movement. #paytoday encourages enterprises and governments to pay their small business customers quickly so they can get more time to outlast shelter-in-place orders. If everyone does their part, a huge chunk of that $900 billion will be sent to small businesses.
Since the COVID-19 crisis struck the U.S., my finance team at Fundbox has started paying our small business vendors every week, instead of every two weeks, and we will continue to do so until the crisis ends.
There’s good reason to think this will have a meaningful impact on small businesses. Aside from the obvious fact—that small businesses are cash-starved right now—the SBA, under the leadership of then-administrator Karen Mills, started a program, QuickPay, to pay small business vendors in 15 days, instead of the typical 30. Academics have since studied the program and determined that even with that small change, going from paying net-30 to net-15, businesses that used QuickPay were better able to hire and retain employees. The change also had a positive effect on their Dunn & Bradstreet business credit score.
We should all be thankful that the federal government quickly pieced together the stimulus package and included over $377 billion for small businesses in it. However, we should not assume that this alone will save all small businesses in the U.S. It won’t. We must do our part and pay small business vendors as quickly as possible.