Big Customers Can Be Riskier Than Small Ones
Posted by: John Tozzi on January 05, 2010
Think big, established companies make less risky clients than small businesses? Not when it comes to getting paid on time, according to recent data from credit bureau Experian.
Companies with more than 1,000 employees are dramatically more likely to be severely delinquent — that’s more than 90 days late on a payment — in the next 12 months than other size businesses. On a 100 point scale, with higher scores indicating less risk, Experian gives 1,000+ employee companies a 34. Smaller businesses score between 55 and 61. Large companies (through November) were behind on 23% of dollars owed, higher than any other category.
Why? Because they can, says Dan Meder, Experian VP of product development and marketing. “They can, in many cases, pay slow and it’s not going to hurt them as much,” he says. When small businesses pay vendors late, it generally indicates that the company has cash flow problems, Meder says. Large companies have the leverage to slow pay vendors with few consequences. “They may not have really severe cash flow issues. They’re paying slow because they choose to,” Meder says.
BW columnist George Cloutier took a lot of heat in the comments of a recent piece advising small businesses to pay late to improve cash flow. I’m not defending Cloutier’s position that angered so many readers. (In a former life as a freelancer I was on the wrong side of more than one late invoice…) But it’s interesting to see that big companies are far more guilty of this than small ones, according to the Experian report.
As many commenters on Cloutier’s piece noted, delaying payments may help one company but simply passes the problem to the vendor. “You’ve always got that downstream effect where if I’m not getting paid, then I don’t have the money to pay somebody else, and they don’t have the money to pay somebody else,” Meder says.
Experian has a tool to show different risk levels by industry, region, and the size of the business. Take a look before you assume that a bigger client is more likely to pay on time.