Searching for Capital

A broker assesses the small-business lending market.

If you had to pinpoint the most important financial issue confronting small businesses, what would you say? I suspect many would argue it’s that banks aren’t lending. For many small-business owners, however, I think the primary issue is that their customers are taking longer and longer to pay them, which creates tough cash-flow and working-capital problems.

President Obama took a stab at solving this problem in 2011. He issued an executive order requiring federal agencies to pay small-business suppliers of goods and services within 15 days of receiving a valid invoice, down from 30 days. Because the federal government awards nearly $100 billion in federal contracts to small businesses each year, the potential impact was huge. Initially, however, the program applied only to prime contractors. And critics pointed out that the payment window did not begin until an invoice was actually approved, which could add weeks or even months to the cycle.

Last July, the QuickPay program was revised to include subcontractors. It now holds all federal contractors to the 15-day standard, “with the understanding that those prime contractors will similarly accelerate payments to their small-business subcontractors.” The Office of Management and Budget encourages prime contractors to pay their subcontractors faster, to renegotiate existing contracts to this end and to negotiate all future contracts to this end. Presumably, the federal government will enforce its updated policy by prioritizing prime contractors that pass these quicker payments along to their subcontractors.

The good news is that we are starting to see results. For several months, I have been working with a client who is a defense contractor and is trying to get an asset-based loan secured by his receivables and inventory. As we were moving through the loan process and completing his audit, everything changed. The government began paying him faster than he had ever been paid before, and as a result, his receivables balance fell dramatically.

This actually created an unexpected problem in that he had planned to borrow against those receivables. But this is what I call a high-quality problem. We will solve it by taking out a loan against his equipment, and because his cash is turning over faster, his cost of financing will go down.

I hope that the QuickPay program will become a model for the private sector as well. Last year I spoke at a TedXNewWallStreet program about an idea for a 10-Day Pay Initiative where Fortune 1000 companies would treat their small-business suppliers the same way. Since we wouldn’t be able to require this by law, I suggested we turn to social media and good old-fashioned shame to get the job done. We would do this by creating a Web site where small-business owners could post their invoices as proof of slow payment. Then, as consumers, we could see how suppliers treat small businesses and pick the ones we want to support.

The reality is that if the government and Fortune 1000 companies pay their small-business suppliers faster, it won’t hurt the big companies, and it will open up opportunities for small businesses and entrepreneurs to grow and add jobs.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2013/02/28/is-obamas-quick-pay-initiative-beginning-to-work/?partner=rss&emc=rss