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Big Customers Can Be Riskier Than Small Ones

Posted by: John Tozzi on January 5, 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.

Reader Comments

Susan Martin

January 6, 2010 9:34 AM

Great info John, I'm not surprised, but am somewhat taken aback by the Experian ratings. My advice to service firms is to try to come up with a way to get regular payments in advance and avoid the whole billing thing altogether. It may not be possible for all industries, but for those who can, it makes a huge difference in their cash flow and profitability.

Biz Loan Central

January 6, 2010 10:04 AM

Although it's good to see the actual data, most small businesses have already been aware of this slow pay environment. SMB's are really between a rock and a hard place because they need the business, but are not in a position to dictate timely payment. All SMB's should explore credit lines against accounts receivable and/or selling invoices to improve cash flow. If a retailer accepts a credit card for payment, this is the same thing as selling an invoice at a discount. By the same token, credit lines using accounts receivable are given at the same cost as accepting a credit card.
Just my $.02


January 6, 2010 2:55 PM

I worked in marketing for several Fortune 100 firms, and that was corporate policy. We paid in 90 days. If the vendors didn't like it, oh well!

Tom Hoyum

January 7, 2010 1:00 AM

Big Customers Can Be Riskier Than Small Ones

After years of credit and collection consulting, I recommend that you
1) Know how much risk in dollars that your company can afford with big customers. Will your profit margin cover excessive delays, such as 90 day terms, followed by periodic payment terms beyond that point? Or if a big customer went bankrupt, can your company go on? You set the risk limits.
2) Know your big customers very well before you sign the contract and continue reviewing them during the business relationship.
3) Use all the credit resources that are available and appropriate for the size of the risk. Major credit components, such as credit reports from a number of credit reporting companies, and credit insurance, can show you a trend of how a big customer does business. Dig deep. Who owns the company? How have they performed in the past, especially during critical times? Are you satisfied with the answers and can you verify them?

These ideas will help you determine what is best for your company and reduce the risk.

Tom Hoyum

Daniel DeHaan

March 13, 2010 1:49 PM

Unfortunately, this problem is all to common. In my small business, cash flow is the number one concern.

I have found it helpful when submitting an invoice to ask the client about the corporate payment procedure. Often times a company representative will be willing to share some key insights.

Personally, I don't mind waiting a little to get paid as long as I know when to expect the money.

-Daniel DeHaan


September 1, 2010 3:15 AM

Payments are backward looking. There are many ways to massage. Prediction should be based on market segment health, market segment position, forward planning within the market segment. Also, consider diversification among the customers that use product as an input.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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