The SupplierPay initiative, launched by the Obama Administration in 2014, was developed with the aim of strengthening small businesses by increasing their working capital.
Larger organizations often rely on smaller businesses for the development and delivery of goods and services. In a recent study by the Georgia Tech Financial Analysis Lab, it was found that corporations take 46 days, on average, to pay the invoices of these suppliers. In most cases, the viability of these small suppliers is dependent on their ability to access and manage working capital. Not only do small businesses experience difficulty in procuring new business financing, when they are successful they face long waiting periods before the funds are released to them. This can be detrimental to many small companies that simply do not have the means to make capital investments or even pay their own subcontractors.
As part of the SupplierPay initiative, companies pledge to pay their small suppliers quicker or enable a financial solution that assists these suppliers in gaining access to working capital at a lower cost; thus giving small companies the ability to employ additional workers and develop their businesses.
SupplierPay follows on the heels of the highly successful QuickPay initiative, which President Obama rolled out in 2011. QuickPay requires federal agencies to issue payment to small business contractors within fifteen days of receiving an invoice. With federal contracts to small businesses comprising nearly $100 billion annually, the impact of this initiative was significant, as over $1 billion in savings was realized by these small businesses, which can eventually translate into enterprise and job growth. SupplierPay has been hailed as the equivalent within the private sector.
Is it actually working?
SupplierPay has been beneficial in providing some small suppliers with faster cash flow. For a few, this has alleviated the need to seek outside financing. While this is true for some supplier organizations, there is no widespread study identifying faster payments to smaller suppliers from those buyer organizations that have signed the pledge.
One of the biggest challenges associated with the program is that once companies have taken the pledge there is no enforcement. With no regulations in place to sanction the change, the average payment time for some of the businesses that have taken the pledge has actually increased. It’s difficult to tell if that increase extends to those smaller suppliers or whether it represents an offset to compensate for paying some of those smaller suppliers faster.
A report from the US Department of Commerce explains another reason that companies might be hesitant to cooperate. ‘The Prisoner’s Dilemma’ is a speculative concept that describes why two businesses might be discouraged from pledging. If two companies make payment to their suppliers on time they both receive the same fair compensation. However, if one company opts to delay payment for the purpose of investing or financing short-term projects, it then has the opportunity to benefit from higher compensation. The other company is now put at a disadvantage and subsequently may delay their payment so that they can also benefit in the same way. As a result, SupplierPay likely accomplishes very little unless all companies get involved and agree to make earlier payments.
There is also the potential that, in order to compensate for earlier payments, big corporations can use their significant buying power and force smaller suppliers to discount their prices.
What can be done?
Without some type of affordable, easily accessible financing for smaller suppliers, SupplierPay is ineffective. Smart supply chain financing (SCF) solutions can assist businesses in extending their payment terms in a manner that is agreeable for both companies involved; yet SupplierPay does little to promote this. Dynamic discounting options, virtual cards, as well as working capital platforms all have the ability to assist with quicker payments.
In addition to making SFC options more widely available, it has been acknowledged that simply changing from paper checks to electronic payments such as ACH can do wonders in alleviating long payment cycles. Recent studies, however, suggests that many large companies face challenges in converting to electronic payments, naming cost, IT barriers and supplier resistance as the top reasons hindering the transition.
In theory, SupplierPay makes good sense and has the potential to make a positive impact but has yet to gain enough momentum to make a difference. For the initiative to be truly successful it would need to be modified from a voluntary agreement to a regulated mandate, with clearer instructions and strict enforcement. But, such a mandate might face heavy resistance from lobbyists with any movement toward enforcement.
While SupplierPay has brought to light the challenges that small businesses face with long payment cycles, it does not seem to have reached the heights hoped for by the White House and runs the risk of becoming stagnant.