The Obama administration this week announced a plan to pay the government's bills a lot quicker. Here's what it means to your business.
The Obama administration changed a small policy this week that might have a big impact on small businesses that work with the federal government.
To understand quickly what happened, imagine two kids: Larry and Bobby.
Larry lent Bobby $10 a couple of weeks ago. Bobby hasn't repaid. Now, Larry is flat broke, and he could really use that $10. Great news! Today is Bobby's birthday, and Larry watches as Bobby opens a card from a relative with a $20 bill inside.
But despite now being flush with cash, Bobby says he won't pay Larry back for a few more weeks. Larry is still broke.
What Changed for Small Business?
That's kind of like the situation between most big contractors and small subcontractors. In the wake of the financial crisis, many of the country's biggest companies changed the terms on which they pay subcontractors, from net-30 to net-60, or even net-90. That means that where, as a matter of course, they used to pay their suppliers 30 days after receiving invoices, they unilaterally decided to start taking an extra 30 or even 60 days.
So, we had a situation where the government paid its large contractors in 15 days, but those contractors could sit on the money, earning interest, for as much as 75 days before paying their subcontractors. From a self-interest perspective, that was the smartest thing they could do. It was free money.
That's where the small policy change with the potentially huge impact comes in.
QuickPay Benefits Extended to Subcontractors
Yesterday, the administration revised QuickPay by extending the same policy to smaller subcontractors as well. The new rule puts all federal contractors on net-15 terms, but "with the understanding that those prime contractors will similarly accelerate payments to their small-business subcontractors," according to the White House.
Now, we're in the middle of a presidential election season. And Republicans panned this as just a "series of modest steps" and "repackaging" earlier administration moves. However, the shorter payment time could make a big difference for some struggling small businesses. And because small and emerging businesses are responsible for almost all net new job growth in the United States, it's a good move.
Back in September, when the government made its first announcement about QuickPay, the head of the Small Business Administration said it would result in "billions" flowing into smaller companies' coffers, by obviating the need for small businesses to borrow money and to cover the float.
"We don't have a hard number, but it's billions," an SBA official told The New York Times then, on the basis of an estimated $98 billion in total government money owed to small businesses. So if you consider the interest on the payments due over a month or two, the official said, "it's single-digit billions."
In the Future, Will Cash Flow Faster?
In truth, if the administration wanted to go a step further, it could have even more impact. Obama could, with the stroke of a pen, issue an executive order requiring that all federal contractors must pay their suppliers within 30 days of invoice--regardless of whether the suppliers are subcontractors on a government contract.
As Jeffrey Leonard pointed out in The Washington Monthly last year, "[v]irtually all major corporations today are in some way federal contractors ... Such an order would cost the government no money. But it would make cash flow faster down the value chain to small business suppliers across the economy, and this could free up more capital for job creation. And the symbolism of a president willing to stand up for the little guy being squeezed by big corporate America would be worth its weight in political gold!"
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