The Situation:
- Banks cannot find enough credit-worthy borrowers to
stimulate the economy -- limiting the effectiveness of monetary policy (which
has so far only helped banks and large corporations).
- In difficult times, companies try to increase cash-on-hand
by reducing AR (with more aggressive collections and lower inventories) and
increasing AP (slowing payments to their suppliers).
- This means big companies accumulate cash by taking away
from medium-sized suppliers, and the medium-sized take cash from smaller
suppliers. Then the [less capital-intensive] small suppliers do not have
the financing to maintain operations (nor the credit to borrow) and must layoff
employees.
The Short-Term Carrot:
- Banks must extend themselves to provide greater financing
rates for SMEs borrowing against receivables and inventory. For example,
rather than lending 70% of receivables and 50% of inventory -- a move to
80%/60% would make a significant difference.
- More importantly, companies have to be provided "AP
Financing". The Fed/SBA et. al. needs to figure a way (via Banks or
directly) to provide funds to corporations to REDUCE their AP days
outstanding. If companies paid their suppliers in 15 days rather than
45 days, there would be little need for other bank financing at many companies.
- The key here is that we can get around the
credit-worthiness issue -- by providing financing to bigger companies so that
they can provide "financing" to smaller companies (by paying of AP
faster). In many ways, companies are best able to manage credit as
customers to suppliers, particularly as they can influence the credit of
smaller suppliers by managing orders from them.
The Short-Term Stick:
- Large companies must be discouraged from taking advantage
of smaller suppliers as they head into recession. I am certainly for less
government interference, but this really is a "public good" arena --
providing funding to SMEs, particularly going into recessions, would be great
for all participants in the economy.
- There are many ways to do this. Perhaps linking
payroll tax credits to AP days outstanding would be an easy one to pursue.
Longer-term Management:
- It has surprised me that companies do not do a better job
of tracking and recording who their AR and AP are associated with. The
SEC/IRS could easily mandate that public companies must categorize AR/AP
relative to: investment grade credits, non-investment grade credits,
unrated credits.
- This would allow policy makers to track and put in place
measures to insure that big companies are not squeezing smaller companies going
into difficult economic times.
