About 85 percent of businesses in a Richmond BizSense survey said that at least one client is paying slower than the stated terms. And once one starts paying slowly, money can get tighter all the way down the food chain. Not helping matters is the fact that three local behemoths are in Chapter 11 bankruptcy protection and will pay vendors a fraction of what was invoiced. The blow from those collapses is just starting to be felt around town and will show up in some yet-to-be-determined ways.
According to the RBS survey, which was emailed to 70 small-business owners, most businesses used to get paid within 30 days. Only one business surveyed said it was getting paid on time by every client. Twenty-five percent said they were adjusting payment terms – some were asking for cash up front, and others were extending credit to 60 days for good customers.
“When somebody starts extending pay terms, they’re getting pretty weak,” said Bob Richmon, owner of Virginia Elevator. Richmon said a few of his customers are taking longer to pay.
“What happens to a lot of these guys,” Richmon said of construction contractors, “when the economy slows down and the cash flow slows, they find out they’re not making as much as they thought.”
The slower economy means business relationships are even more important, he added. “If I communicate and know the people, then we can work through it. And I don’t mind extending it a little bit.”
Richmond obviously not the only place this is happening. A February study by the Credit Research Foundation found that 78 percent of businesses have seen a slowdown in business-to-business customer payments.
The trickle-down effect is in play: One BizSense survey respondent who asked not to be identified said his company was delaying the hiring of a part-time employee because of cash flow issues.
And dealing with slow payers can be tricky, especially for companies that might not want to sever ties entirely. But such an end move might be on the rise in coming months as weaker companies have more and more difficulty.
As a builder with operations across the state, Bud Ohly is on the other side of the invoice equation, paying more invoices than he sends out on behalf of his company, Eagle Construction of Virginia.
Ohly said the tougher times make it even more important to pay on time, and it’s something his firm prides itself on: cutting checks every two weeks.
“It’s the right thing to,” he said. “As long as we’re getting paid, we continue to pay, and we can attract the best help.”
Ohly, like Richmon, said that a slow-paying client can be a warning sign. “We see it often in our business, the spiral. First it’s every 30 days. That becomes every 60 days, and then 90. … Once you start that cycle, you may not be able to stop, and in this deteriorating environment, it only gets worse.”
Keeping the Cash Flowing , An NYT story with lots of helpful links.
Getting Tough with Customers, Business Week