The WSJ reports today that as economic uncertainty persists, large companies are more successful than smaller companies in retaining their cash. They do so by paying their suppliers later – delaying payment out to 120 days or more in some cases – while simultaneously tightening the credit terms they offer their own customers, forcing them to pay sooner. This “corporate Darwinism” relies on the buying power of larger companies and their relative influence over smaller firms.

In these times of limited lending and tightened credit availability on cards and lines of credit, smaller companies are significantly disadvantaged. What makes matters worse, the research shows, is that smaller companies historically pay their suppliers sooner and collect from their customers relatively later than large companies. The credit crisis has exacerbated this trend even further, as this graph from the WSJ illustrates:

(Graphic: WSJ)

What to do?

Electronic payment can ease the pain for companies caught by this squeeze. Accepting credit card payments accelerates funds availability (assuming that the transaction occurs at the time the invoice was originally due, not at 120 days!) and so can ACH direct deposit (at least eliminating the mail time and deposit processing delay, which can be considerable when you consider that smaller companies are typically not lockbox customers). Alternatively, suppliers can offer their customers an early pay discount, typically “2/10 Net 60,” where the paying company can deduct 2% from the invoice total if they pay within 10 days, rather than waiting the 60 days until the payment is due. Large buyers with efficient A/P processes have been known to take the 2% discount on as many invoices as possible, regardless of the supplier’s intention. Some other suppliers are taking matters in their own hands and selling their blue-chip receivables to the highest bidder on The Receivables Exchange. Others are utilizing old-fashioned factoring arrangements to accelerate incoming cash.

Attention payment solution providers: What are you doing to help your mid-size and small customers manage their receivables and payables like the savvy big guys? Don’t wait and watch as your customer base succumbs to evolutionary pressure!