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Small suppliers wait 300 days
Primes lean on small shops
The big defense contractors, known as the primes, produce 60 to 80 percent of what they sell through their small business supply chain. The shops that make most of it sit at the bottom.
Squeezed for 40 years
Those shops have been squeezed for 40 years with poor margins. Payment terms run 300 days, and after the 2008 crisis it became effectively illegal for a small business owner to get a machine loan.
The supplier base
Roughly 40,000 to 50,000 certified suppliers sit in the defense supply chain, many of them patriots who have been waiting for this kind of opportunity. No one has figured out how to enable them from the bottom up, and the financial issues come first. Letting small businesses do a lot more, a lot faster, is a huge unlock.
Why do large buyers stretch supplier payment terms?
Paying later lets a large buyer hold cash longer, which works like a free loan from its suppliers. Small suppliers have less bargaining power, so they often accept the terms. The U.S. government responded in 2011 with the QuickPay initiative, which directs federal agencies to pay small business contractors within 15 days instead of the usual 30.
Why did small shops struggle to borrow for machines?
After the 2008 crisis, regulators raised capital requirements for banks through the Basel III framework, agreed in 2010, and lenders tightened their credit standards. Machine tools are expensive, and a specialized one can be hard to resell, which makes it weak collateral. Small manufacturers also tend to depend on a few customers for most of their revenue. The Federal Reserve's Senior Loan Officer survey showed banks tightening business loan standards through 2009.
How are defense suppliers organized in tiers?
Prime contractors sit at the top and buy from first-tier suppliers, who buy from second-tier suppliers, and so on down to the makers of raw materials. Each tier passes quality requirements down to the next. The Pentagon refers to this web, together with the primes, as the defense industrial base.
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