So, I’ve got a small consulting business. I’ll offer to do some work. I’ll do the work. I’ll send the customer the product. Customer is happy. I’ll submit an invoice for the work. Customer…pays whenever they feel like it. Sometimes they owe me 10 grand and haven’t paid for over a month.
This means *I *can’t in turn pay my employee, and if cash gets really short, I can’t even pay my landlord, the grocer, the insurance company, etc etc etc. Since those people weren’t paid, then they can’t…
Recently I did some work for a company that apparently can’t pay me because *they *haven’t been paid the 175k a larger company owes them, nor the 4 million dollars for a couple of shipments of equipment made recently. The company’s owner assures me that there’s tons of book money, but they haven’t been paid on their invoices.
This puts me in a bind - I want to order some equipment to investigate a new method of doing things, that will really help if it works, but it doesn’t make sense to do that for a company that hasn’t paid…
So, I dunno. If laws actually could compel companies to pay promptly, or if third party escrow was more commonly used, wouldn’t everyone be better off? I suspect the reason the larger company that owes 175k to the company that owes me 10k doesn’t want to pay because they are owed tens of millions of dollars for oilfield services from their customers.
It’s a lot worse now than it was 30 years ago. You’re right it’s simply a matter of “the big fish doesn’t feel like paying, yet, so the small fish starve.”
A common countertactic has been to offer a hefty discount for prompt payment. Like 2% off if paid in 15 days. You’re offering them an investment with an APR of 24%. If they have anything on the ball they’ll take it.
The alternative is what you have now; you’re still acting as a banker subsidizing their cashflow. But you’re not getting any interest at all for doing so.
This is also why it’s nice to ensure your customers really need you. When they call up in a panic your answer should be “Pay all outstanding invoices in certified funds today & then we can discuss the pre-payment terms we’ll need from you to handle this latest crisis. Bye, gotta go, there’s a *paying *customer on my other line.”
I just *love *delivering that soliloquy to some antsy customer.
I suspect the ramifications would exceed the benefits - if companies can’t count on some flexibility in their AP, they will get tighter with spending overall.
But I sympathize. I finally had to refuse further work from one of my anchor clients because despite all prompts, talks, promises etc. they had me on 90-120 days. Between my costs for their work, on which I had to pay interest, and the payment for my hours, I had to juggle other work just to keep the cash flowing, even with many $k in receivables. Even months after we parted ways, it took 90+ days to get paid for a couple of small jobs done as a courtesy/re-start token.
They have a surprise coming, next call. No, I won’t take the job. No, they can’t have all the art, live files and materials I’ve deleted and/or archived offline. Guess they’ll have to find someone else to recreate it all and wait a third of a year to get paid.
I don’t think it would make the economy run better; in fact I think it would make the economy worse. The rigidity that would result from limiting the flexibility in the use capitol in this way would lead to less efficiency overall.
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I mailed the check Tuesday; you should be getting it any day now.
I used to work for a company which often took more than a month to pay. But, if the vendor gave a small (one or two percent) discount if paid withing ten or twenty days, they’d get their money that quickly. (Since I suspect the vendor built the extra money into the bid, they didn’t actually lose out on the deal.)
That works for first-time or infrequent clients. For ones you have a running relationship with, it’s both awkward and relationship-killing to demand upfront payments on each job or stage of a job.
It’s on them to honor contract and billing terms, which might be 15 or 30 days net. I think what the OP is talking about is when they blithely ignore these terms as mere suggestions or requests. Repeatedly. After being asked not to. These clients are often more likely to forego work or find someone else if you start asking for upfront money.
I work for a guy who has two cafes and a catering business. The cafe I’m a bake in is located in the public library, and there are meeting rooms for groups of all sorts. If they want food they have to order from us.
So we feed them and they get an invoice, then they schedule another meeting and order food without having paid for the first. On occasion the manager has spoken to the person responsible for paying, and they have the nerve to get indignant when she says, in a nutshell, “No money, no refreshments” Small church groups or sorority alumnae organizations are the worst.
My theory is that changing the rules to discourage this method of “receivables loans” or whatever would be the same thing as “tightening up” a big machine by welding some of the pieces together instead of having long slack cables interlinking them. This tightening might have benefits and drawbacks - the benefit is, it would raise performance. The sooner my customer gets paid, the sooner they can pay me, and the sooner I can burn the midnight oil doing the next piece of work, and the sooner I can put in that big order to my suppliers for prototype equipment, and the sooner I can feel secure about my cash flow and buy a yacht or something. Everyone wins.
Of course, in a downturn, this tight linkage could be a problem. Company starts to run low on money, and they suddenly can’t pay their suppliers, and everyone will know because in my proposed system everyone pays promptly within 2 weeks or whatever.
There will never be a U.S. law about this, because the worst and most egregious about paying on time is the U.S. government. I worked for two startups that went under partially because the government routinely took *years *to pay for stuff.
Your theory seems to be based upon never having an introductory finance class, or looking thoroughly at the numbers. For large corporations it is often considered bad if your uncollectables percentage is too low, it means your credit policies are too tight and you are actually making less profit than you would if you loosened them a bit. This is not not something theoretical, it is just something that happens in the real world and the numbers bear it out. In the case of the OP though, the small size of the business changes the whole dynamic.
That way my thought too. Allowing debtors to take a little time to pay is a way, in essence, of “creating money.” Ideally, they’re using that money to invest in profit-making activities, and so it stimulates the overall economy. Every creditor is offering zero-interest micro-loans.
There already is such a legal option. Put in writing in every contract that bills are due 30 days from delivery, no excuses, and that time is of the essence.
Then, as soon as a customer fails to pay on time, instruct your solicitor to bring an action in small claims for the unpaid bill.
Do that regularly with all your customers who don’t pay on time. Will it help with receivables? Or will you lose customers because the policy is too rigid? Your call.
Missed the edit window: if that isn’t the type of legal remedy the OP is thinking of, please give some indication of the type of law you are envisaging.
Contracts can’t have illegal provisions. The law would make it illegal to have payment contracts where the payment isn’t within a few days of delivery. For handling warranty and testing issues, the payment can be made to an escrow company until the customer finishes acceptance testing, etc. (with a hard limit on escrow of 90-180 days or something) If the money were in escrow, at least you know it’s there and you’ll get paid if the product is good, instead of it being a mystery.
Ignoring the payment contract means some kind of language in the law that states the violating party owes a significant fine, and most of the time wasting legal maneuvers a large company can engage in are prohibited or something.
I dunno. I didn’t major in law or finance. All I can see is that these delays slow down the operation of any small business. Can’t spend money for the next job if you don’t have any money to spend. It forces the business to hold on to a significant cash reserve to buffer against stuff like this, instead of spending that cash on payroll or more equipment. And I know the big companies get to ride roughshod - you can’t afford the attorney’s fees to sue em, etc. “Whatcha gonna do. We’ll pay you when we feel like it”
Reason the government has to get involved is it’s tragedy of the commons. Each company benefits by not paying for a while to “float” their cash reserves. But it hurts everyone - the big companies are just waiting on bigger payments.
So the law would take away the parties’ freedom of contract and impose a time limit that applies to all businesses and industries regardless of the desires of the parties and the practices in the particular industry? A mom-and-pop store would be under exactly the same rules as Boeing, regardless of their respective financial positions and their business sophistication?
And there’s no discretion? What if Purchaser calls up Vendor and says "I know my payment is due today, but I just heard that one of my major clients went into bankruptcy. All their assets are frozen until the receivers have gone through their books. I was supposed to get a major payment from them today, but now I won’t see that money for a month and even then I may just get 50¢ on the dollar. I have a cash flow problem and I hope you can give me an extension?
If you and some of my other creditors don’t give time, I may have to go bankrupt myself, and goodness knows when or if you’ll get paid then."
Would agreeing to the extension be illegal in your proposal?
And who would then enforce that breach of the contract? You’ve already said that most small businesses couldn’t afford to sue. If so, how does the breach by the business in default get remedied? Would you need a government agency to enforce these late payment claims?
most of those “time wasting legal manoeuvres” are called due process, which has constitutional protection. That’s particularly the case if a government agency is involved in enforcing the claim for payment, and is arguing that the company should be fined.
Are you suggesting that a debtor company’s constitutional right to the protection of due process for its property can be over-ridden?
Look, we can discuss implementation after we even agree on if there is a problem. Do you agree it’s “tragedy of the commons”. It’s like pollution. Each individual firm benefits by polluting and paying slowly. Collectively, they hurt everyone.
If you don’t agree it’s a problem, there is no reason to fix it. With that said, if there is a problem, the only possible entity that can fix it is the government. (if the incentives are such that it’s a thing that is good for individuals but bad for the group, only the government has the incentives and power to fix it). How to fix it is a matter of implementation - my examples were to show that the government can do things that would reduce the problem although those things might not be the best option.
It is common in the construction industry for the subcontractors to not be paid until the GC is paid for the work completed in place. Therefore you bill the GC, the GC bills the owner, the owner pays the GC, the GC pays you.
If you signed a contract with the GC I am sure you agreed to not be paid till 30 days after the GC is paid.
Several things you can do.
One if to insist on a separate billing for material delivered to the jobsite and bill that the day after it is delivered.
Another is to put the cost of waiting for your money in your bid. This is common practice also. You don’t tell the GC you just put the carrying cost of the work billed for 30-60 days in your bid.
Finally, on the plus side for you is if you are not paid at all you can file a Mechanics lien against the property you did work at. Meaning the owner will not get a clear title till you are paid. It is called different names in different states, but this is a well understood concept in construction.
It’s not a problem at all. Our economy works extremely efficiently. This is not a tragedy of the commons, its a tragedy of being a small business that is not highly competitive. There are all sorts of payment options - advance payment, escrow, you can issue a note (a note has more legal protections).
Larger businesses generally have their credit policies fine tuned, so they are less effected by this sort of thing.
You would just have an overall decrease in business activity, which would also effect the small business negatively. Your theory kind of reminds me of Sharia law where nobody can charge interest; no major economies are looking at that and saying “we gotta do this” last time I checked.