SMEs tough out the economy: late-paying clients, slashed credit lines and tightened terms are the realities for today's small- and mid-sized entities as they scramble to survive in the struggling economic recovery.

• Author: Sweeney, Paul
• Position: WORKING CAPITAL

Mike Smith, who took over his family's Houston-area trucking business several years ago, says that he's being financially whipsawed.

His small company, K-Mac Vacuum Truck Service, based in Alvin, Texas (about 45 minutes southeast of Houston), operates five trucks that provide waste-hauling and cleaning services to some 30 oil-drilling concerns. Recently, however, his customers have grown increasingly balky at meeting their obligations. Clients who used to pay their bills in 30 days are now taking 60 days, while those who used to pay in 60 days are delaying payments for 90 days. "Getting paid," Smith says, "is my biggest problem."

And that has reverberations. It means that Smith is unable to pay in a timely manner all but the most urgently pressing of his bills. "I'm getting lots of phone calls from people wanting their money," he says. "But if I'm not getting paid, I can't pay them."

At the same time, Smith says, his bank has reduced his line of credit. What has happened, he says, is that his financial institution is basing this year's line of credit on performance numbers from recessionary 2009, when revenues fell to less than $1 million from a robust $1.8 million in sales in 2008 (when oil prices were shooting through the roof).

Not getting paid for accounts receivable? Banks and financiers cutting back--or completely eliminating--loan amounts and lines of credit? Smith's lament is being repeated across the country at offices, stores, manufacturers, warehouses and other worksites of small businesses and medium-sized companies, which form the bulk of United States commerce and industry. In turn, the phenomenon is wreaking havoc with the fledgling U.S. economic recovery as it tries to put the darkest days of 2008-09, sometimes called the great recession, behind it.

There are a fortunate few exempt from the current economic bind. According to the U.S. Federal Reserve, the 500 largest U.S. corporations were holding $1.8 trillion in cash reserves at mid-year 2010.

But for a significant chunk of the small- and medium-sized enterprises (SMEs)--which account for a "disproportionately large share of new jobs" in the U.S., according to an analysis by the Organization for Economic Cooperation and Development--maintaining working capital in the form of earned revenues and financings remains a significant challenge.

As finances tighten, SMEs are cutting costs and formulating survival strategies. The U.S. Small Business Administration defines a small business as a usually privately owned business with fewer than 500 employees and less than $10 million in sales. Medium-sized companies are an even more amorphous group, since definitions differ; BDO partner Mat Wood says that would include companies with $25 million to $250 million in sales revenues.

"Everyone is going in the...