Pertinent Perils

Better Than Green Shoots

I have written several blog entries on the topic of government policy to unblock the flow of credit to the small business sector. I was motivated to do so by the recent hearing of the U.S. Senate Banking Committee at which small business credit was the topic that absorbed most of the focus of Treasury Secretary Geithner and the Committee members. Clearly their constituents are making known their displeasure with the fact that while small businesses create more than half of all U.S. employment, Wall Street investment banks, whose payrolls were shrinking even prior to the credit crisis, availed themselves of substantial government bailouts, with virtually nothing going to small businesses. Having critiqued the substance of what was discussed at the hearing, I would now like to put forward my own recommendation for a positive policy option.

The U.S. federal government has substantial purchasing power; it is the world’s largest buyer of goods and services. Contracts with the federal government are typically on net thirty day payment terms. Yet the federal government has been stretching out payments to its small business vendors to 140 – 150 days. I have had dealings with this issue as my small business was a bidder for microfinance contracts of the U.S. Agency for International Development. I know that this experience is not unique to me; I travel around the country speaking to small business groups and hear that this is a universal phenomenon. Last June, for example, I spoke at a small business awards luncheon of the Colorado Springs Small Business Development Center. As the Air Force Academy is located in that area, there are many local small businesses that are contractors or sub-contractors to the federal government. Their owners reported to me the same issue of delayed payments, to 140 – 150 days.

This means that small businesses are unwilling creditors, financing interest-free purchases to the federal government for up to five months at a time. If the federal government were to pay its obligations in a timely manner, that could substantially alleviate, but not eliminate, the strain on working capital that many small businesses are experiencing. This would allow small business contractors, in turn, to pay their obligations in a timely manner and would recycle funds in the economy. But wait, you say. We have a credit crisis. The federal government is printing money to monetize its debt. It cannot afford to pay its obligations in time. But it does – selectively. The banks that received TARP aid (Troubled Asset Relief Program) all received their funds within days. Paying small business promptly, as they are contractually obliged to do, for work performed is the best “assistance” that the federal government can provide our sector.

If the U.S. federal government were to pay its small businesses in accordance with the terms and conditions for payment, which are typically net 30 days, we would be playing catch-up with what other governments are doing to support their small business sectors. In Ireland, for example, Fine Gael leaders have proposed a small business rescue package that requires prompt payments to businesses from the government for procurement contracts.