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Delayed payments can take a big toll on small businesses

CLEARWATER

As the morning rains suddenly swept in, Lou Keister grabbed a tarp and ran outside, trying in vain to cover one of the milling machines that auctioneer workers were hauling out of his machine shop en route to a liquidation sale.

"I have no control over it," he said, shaking his head.

"Let it go. Let it all go," his wife and shop co-owner, Eileen, said with a wry smile. "We've got our health. We've got each other. We'll get through it"

In a broad sense, chalk up last week's closure of Rock's Precision Machining as another small-business failure linked to slumping demand. But the final blow was something more pervasive and problematic than many small businesses like to acknowledge: Billings to a key customer —namely, Honeywell — went unpaid for months, leaving the couple unable to keep up with their own bills.

The Keisters' situation is not unusual. Consider:

• Businesses this year are waiting 29.2 days on average for payments after they issue an invoice, according to a report by financial analytics firm Sageworks. That's up 27 percent from the average lag time of 22.8 days just three years ago.

• The National Federation of Independent Business, which lobbies for small-business issues, found in a survey last year that 64 percent of 850 small businesses polled reported waiting at least 60 days to have some invoices paid. About 20 percent said the delinquencies were getting worse.

In the Keisters' case, the dispute with Honeywell stretches back to a $1,650 unpaid bill in February and then other invoices that totaled more than $5,000. The aerospace giant, which has a large facility in Clearwater, told the couple they never received the initial invoices. A week ago, the Keisters received two checks in the mail covering some of the funds due. But the money was too little, too late for Rock's Precision Machining.

"It's just so wrong that a big company like Honeywell can't pay," Eileen Keister said. "These are the job creators, as it were. If we had gotten the money we were owed from them, a little over $5,000, we would have probably been fine last month."

She acknowledged the shop had already been scraping along month to month, but the delayed payments from Honeywell pushed it over the edge. "They basically euthanized us after we had our legs broken," she said.

Jonathan Field, whose Tampa firm, Emerge 180, advises small and medium-sized businesses that are in financial crisis, isn't surprised by the story. In fact, he ranks drawn-out payments from customers as one of the three biggest reasons small businesses are struggling to recover, along with continued tight credit and a spike in unemployment taxes.

"These companies are getting into a cash crunch because in order to meet (new) orders, they're having to put out their own money. Or if they have to borrow money, the rates are not exactly friendly," Field said. "I think what's happening is the larger the client you deal with or the larger the customer is, the more leverage they have and the slower the payment is going to be."

The issue first bubbled up during the Great Recession. The old rule-of-thumb of paying an invoice within 30 days was extended to 60 days or more, said Jim Parrish, a consultant with the Small Business Development Center in Tampa. During this tepid recovery, that time frame may have fallen back to 45 days for some industries, he said, but the 30-day standard hasn't come back.

"It's easy for people even after they have the money to keep it and not pay their suppliers," Parrish said.

Often, a slow-paying major customer is a problem that goes unspoken. Complain about the hand that feeds you too loudly and you might not get fed at all.

Field says he hears nightmares about small businesses that feel fortunate to hook up with a major client like Walmart, only to endure a cash crunch waiting up to 180 days for an invoice to be paid. Cash flow is the life blood of every small business. If bills aren't paid on time, owners have to find other sources of money to buy equipment and materials, pay the rent and pay employees.

A delayed payment of a couple of months isn't that critical when revenue is flowing with a lot of other paying customers. "If you have a big enough company with a lot of stuff in the pipeline, it's kind of a wash," Ed Keister said. "Unfortunately, with smaller shops like ours, it can be the kiss of death."

Ed Venner, whose Largo company, Ven-Tel Plastics Corp., makes plastic injection molding, said he runs a tight ship to avoid a similar nightmare over accounts receivable. A credit hold is placed any time a bill goes unpaid for more than 60 days.

"We have simple rule," he said. "If you don't pay me in 60 days, I hold your mold hostage."

Eileen Keister used to have a sweeter way of ensuring customers paid on time: bribe them with chocolate.

That worked, at least for a while, for one of her company's biggest customers in the early years: Cobham Sensor Systems. Eileen cultivated a relationship with an accounts rep at Cobham who had a sweet tooth.

"I had no problem working the system," she said. " I had no problem sending her chocolates."

The Keisters relocated from California to Florida to care for Lou's ailing mother and, in early 2007, bought Rock's Precision, a 1,200-square-foot shop tucked behind a cluster of bail bonds shops fronting 49th Street near the Bayside Bridge.

Lou loved meeting an engineer's challenge to reverse design a machining part, or getting the specs exact down to the ten-thousandth of an inch. Miss the cut "and it's junk. It's useless," he said. "But when you do get it on target, it can be really rewarding."

For the most part, top client Cobham paid on a timely basis, though it needed prodding at times. One invoice to Cobham for about $1,000 remained unpaid even as Rock's was closing down. A Cobham spokesman could not be reached for comment.

The problem with Honeywell, which had morphed into their biggest customer, loomed much larger. The Keisters said Honeywell told them that they had lost the original invoices from February. The bills should have been sent to a new email address, the company said. The Keisters said they were never told of a change in a billing system they'd used for years and the company still didn't pay after being alerted.

"I believe they use that money to make overnight investments, to make money for the stockholders," Eileen said. "These job creators are getting rich while people like Lou and myself don't have money for house payments or groceries."

Honeywell spokesman Christopher Barker said the company is a "net 30 operator," meaning its standard policy is to make a payment within 30 days . He said that Honeywell's procurement office flagged the Keisters' bill as soon as it became aware of a problem June 5 and immediately sent out a payment.

"Bottom line, the guys have been paid," Barker said.

In the end, the long wait proved devastating. The Keisters maxed out their credit cards and their credit line at Bank of America. They used up their savings.

Unable to pay this month's rent, their landlord converted their deposit into the monthly payment, giving them until the end of June to move out. They figure they'll lose their house in Brooksville; they scheduled a meeting with an attorney to talk bankruptcy options.

Lou is 59; Eileen is 58.

They've got no plans to open a new business. Rather, they're planning to move back to the West Coast.

And they're not bitter.

"There aren't any villains in this," Lou said as he swept up metal shavings.

He said he doesn't know for sure if places like Honeywell delay payments due to bureaucracy or as part of a corporate culture to hold on to cash and accrue as much interest as possible before paying up. Regardless, he and Eileen are ready to move on. They're excited, even, to let loose and not feel constrained by all the things they had owned. Eileen longs to be near family again; the "desert kid" in Lou misses the joy of off-road motorcycling.

"I feel like I've been on a treadmill and the economy has knocked me off," Lou said. "And I ain't getting back on."

Jeff Harrington can be reached at jharrington@tampabay.com or (727) 893-8242.

Delayed payments can take a big toll on small businesses 06/16/12 [Last modified: Saturday, June 16, 2012 11:40pm]
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