To Save Small Businesses, Congress Needs to Make Corporations Pay Their Bills

During the COVID-19 pandemic, managing cash flow is a major challenge for every business, large or small. That task, however, is especially challenging for small businesses that sell goods or services to larger companies, otherwise known as business-to business (B2B) companies. Under pressure to cut costs and preserve cash, large companies are forcing their smaller suppliers to accept extended terms on their pay obligations, such as 90 or 120 days, instead of the normal 30 days. This, in turn, forces the smaller companies to cut back on their spending or to borrow to finance their receivables. 

In other words, small companies are providing a hefty portion of the financing to help big companies get through the crisis. 

Two questions naturally arise. First, if we want small businesses to survive, does it really make sense for them to finance their larger customers? And second, is this a “back door” for large companies to indirectly - and improperly - benefit from the Paycheck Protection Program (PPP) intended for small business?

The COVID-19 challenge may be new, but this type of cash flow problem is familiar to small businesses. There has been a trend in recent years by large companies to aggressively manage cash flow in order to minimize borrowing and maximize cash balances. They have aggressively demanded, and received, extraordinarily favorable terms from smaller suppliers. It’s an open secret in the B2B industry that if you want to do business with a large corporation, you have to play by their rules. 

As an owner of a B2B company myself, I have seen this problem many times. Small business owners recognize that power imbalance and simply try to adjust accordingly. However, the COVID-19 crisis is making a bad situation exponentially worse. 

The $2 trillion CARES Act divided money to help businesses into two piles: small businesses got $377 billion and big corporations got $500 billion. The small business funds have been funneled through the Paycheck Protection Program (PPP), which turned out to be so in demand that it ran out of money in less than two weeks before countless mom-and-pop businesses ever saw a dime. That indicates a desperate and alarming level of need among small businesses, and the woeful inadequacy of the government response.

After that $377 billion was depleted, news broke that many notable large, public companies received funding by completely manipulating the rules of the program. While many very small borrowers - the intended recipients - were left out altogether. 

On April 24, Congress added a much needed $321 billion to the PPP and modified some of the rules to better target the funds. This is a great step, but if we truly want to ensure the survival of small businesses, we need to make rules that stop large companies from passing their problems on to their smaller suppliers. 

Under the CARES Act, big corporations have access to $500 billion by working directly with the Treasury Department and the Fed.  These two programs should not be considered totally separate - they are interconnected by the way that larger corporations relate to their smaller suppliers and partners. If large corporations receive massive bailout funds with minimal strings attached, they can and likely will spend that money to enhance their bottom lines and improve their stock price. Those are all well and good business activities in normal times, but in a crisis where millions of small businesses are on the line if those companies don’t pay their bills, there will be many unnecessary casualties. 

The Fed and the Treasury Department could mitigate this problem by requiring companies that benefit from that $500 billion fund to pay their smaller suppliers on time and according to reasonable terms. For many small B2B businesses, this could mean the difference between survival and total failure. They and their bankers desperately need this kind of support, and it wouldn’t even cost the government one additional penny. It’s an easy way for our government to demonstrate real and tangible support for small businesses.

Frank Patitucci is the CEO of NuCompass Mobility, a small B2B company. He is an active member of Patriotic Millionaires.