You’re the Boss Blog: Will Obama ‘QuickPay’ Policy Mean Billions to Small Businesses?

The Agenda

How small-business issues are shaping politics and policy.

On Wednesday, the White House made good on President Obama’s pledge, in his jobs speech to Congress last week, to speed up government payments to small-business contractors. The new policy, which has its own product-like branding, QuickPay, reduces the government’s payment time from 30 days after receiving an invoice to 15 days. In a statement, Karen Mills, Small Business Administration administrator, lauded the new policy: “QuickPay is a smart and powerful boost that effectively delivers billions more dollars into the hands of small contractors so that they can do what they do best — create jobs.”

Really? Billions more dollars? The Agenda thought an elaboration might be in order here, so we called Joe Jordan, the S.B.A.’s associate administrator for government contracting and business development.

The billions more dollars, he said, represent the interest saved on the cost of financing the goods and services produced for the government. Many businesses — perhaps most — do not finance their production or inventory out of earnings but rather by borrowing against lines of credit or taking out other loans. Even those that do rely on earnings then have an opportunity cost. “By cutting the receivables time in half, you’re reducing the negative float — it’s the financing cost of the good or service they just sold to the government,” Mr. Jordan said.

Small-business contracts officially totaled about $98 billion in 2010, so the financing cost that will be saved by halving payment time is some small percentage of that. “We don’t have a hard number, but it’s billions,” Mr. Jordan said. “But it’s single-digit billions.” For businesses with large contracts, in the range of $100 million, Mr. Jordan said the reduction in negative float could make a real difference in freeing up money for investments. “There are certain break-even points where the math definitely works on hiring new workers because of the savings.” Mr. Jordan, though, could not say immediately how many small businesses receive $100 million contracts.

There are other benefits, too, he added. Faster payment lessens the uncertainty in making those investments and reduces the transaction costs associated with financing production — the time spent tapping credit lines or paying them down.

So there you go.

QuickPay applies only to officially designated small-business contractors, not the behemoth corporations that do much government work. And the policy covers only prime contractors, those companies that deal directly with the government. But many small businesses also serve as subcontractors to other prime contractors, and Mr. Jordan acknowledged that subcontractors often have to wait to be paid for their work. (In fact, according to Washington Monthly, some major corporations have, as a matter of policy, extended payment times to small vendors to 60 or even 120 days.) Mr. Jordan said the administration had taken up the issue, but added in a subsequent e-mail that “expanding this to subcontractors is still an open question.”

Article source: http://feeds.nytimes.com/click.phdo?i=5ed4ecfce61bdbaf40d73e49150d8f6c