Tardy Government Payments Cause Turmoil for Small Firms

The brouhaha last week over the Valley Economic Development Center's debt illustrates how a glacial government payment system can help throw a small-business assistance center into turmoil.

Squeezed by tardy government payments, any leadership problems that might exist are heightened, a financial crisis is created and the reputation and image of the center are tarnished.

The problem, however, is not restricted to nonprofit agencies such as VEDC.

As more and more small businesses are urged to get online and engage in government contracting, they could well find themselves in the same predicament. Government agencies at all levels and even large corporations have earned a reputation as bad partners when it comes to paying small businesses.

"We constantly hear complaints, because it usually takes 30 to 90 days before they get their money," said Sharon Merino, whose Pasadena firm, Small Business Consulting Agency, assists small-business owners with government contracts.

"There have been times when I see bids come across my desk and I don't apply, because I simply can't afford [to wait for payment]," said Wayne Adelstein, owner of Decision Communications in Encino. "It's not good public policy because it precludes anybody without the money from coming in."

The situation is illustrated by a small-business owner who began delivering services this month to the city of Los Angeles and joked that payment would probably arrive in the next millennium. A city official, not joking, agreed.

Why do these delays happen?

One reason is accountability. Government officials need to make sure that they are getting what taxpayers are paying for--and that translates into reports, lots of them.

Numbers must be kept quarterly on such things as the number of people assisted, their demographic and economic profiles, the type of assistance given, whether or not they secured a loan or procurement dollars, how much money they obtained, what the money was used for, how many workers they hired as a result of the assistance, how their businesses were improved and a variety of other things.

If part of a report is filled out incorrectly, the entire report is rejected and shipped back to the business assistance agency, which must start all over again.

The result can be holdups in payments that, with just a three-month delay, can cost an agency such as the VEDC $90,000 or more.


Similar problems can plague small-business owners who contract directly with the government.

Contractors who complain they aren't paid in a timely manner often find they didn't submit the proper invoice or didn't get a purchase order number, Merino said. In government work, and frequently in large corporations, the person using the small business may not have the authority to pay the firm.

"I usually ask: 'Do you have a budget and can you cut the check?' " Merino said.

Another tip-off is if the bureaucrat or prime contractor asks for a tax identification number or a federal identification number, Merino said, adding, "If they don't ask you for those, then you're not going to get paid."

Subcontractors often find that prime contractors won't pay them for 180 days, claiming they haven't been paid yet, either. Merino suggests that subcontractors find out who is writing the check for the government agency, so they can double-check to make sure the prime contractor has, in fact, not been paid.


But government agencies are not blind to the problems that payment delays cause small businesses. A number of solutions are being proposed and provided. They include:

* Purchase cards: Also called smart cards, they are used like credit cards to pay businesses on the spot. At the federal level, all purchases of less than $2,500 must be made with the cards, with usage amounting to more than $4 billion annually. Last year, the state used its Cal-Card to buy $162 million worth of goods and services. In addition, 71 cities and 31 counties in California are using the state's purchase card program. The city and county of Los Angeles have been slow to get on board.

The drawback to the cards is that, like a credit card, banks charge a fee per use. For businesses with tiny margins, a 1% or 2% fee and a monthly maintenance charge of up to $45 can cut into profits.

* Bridge financing: Los Angeles County is considering linking with a bank to provide, in essence, loans to small-business owners. The small firm would be paid in advance by the bank, which would wait for the contract payment from the county. But the small firm would have to pay a fee for the advance.

* Electronic payments: The Defense Department now pays electronically, depositing checks directly into business bank accounts. Los Angeles County and the state are exploring the idea of doing all of its purchasing electronically, but the technical capability may be several years away.

Despite attempts to speed processing, the reality is that delays arise in any big entity, whether a government agency or corporation.

"With anything that's big--and that's anything bigger than yelling down the hall and saying 'Cut the check for so-and-so!'--there will be problems," Adelstein said.

Maybe that's why small businesses continue to outpace corporations in job growth. By the time a large corporation or government agency gets around to doing something, a small business has already been there and done it before them.


Vicki Torres can be reached at (213) 237-6553 or at vicki.torres@latimes.com.

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