A Distributor Asks: As a distributor who counts on timely payments to meet financial obligations (including sales commissions for employees), how should I handle clients who make paying in 120 days a regular part of doing business with them? Or, how do you handle companies that look for any small mistake in an invoice and automatically extend the payment by 30 days? I’ve had to decline contracts because I can’t take the risk of the delayed payment.
I would think things through before accepting 120 days for payment. I do not accept anything over 60 days within my company, and that needs to be for a darn good reason.
Is this customer worth it? In my experience, large buyers expect great pricing. If they are asking you for bare bones on margin to get their business, is the onus on you to be their supplier as well as their lender? Assess how much you are really making when you consider thin margins plus the amount of time invested in the actual purchase plus interest that you pay when you pay your suppliers on time but carry your customer.
Do you dictate terms to your suppliers? Can you go to [a large industry supplier] and tell them you have decided to extend your payment terms to 120 days and still have them continue to ship product to you? I don’t know, maybe you can. (If you can, tell me how!)
Large buyers may appear attractive initially but they do require a lot of care and feeding. I would evaluate them thoroughly; if you’re spending 80 percent of your time servicing a client that nets you 20 percent of your volume, it may be time to weigh the worth of the client. If one thing goes wrong on a razor-thin margin order, you’re “hooped” (embroidery pun intended!).
Good clients aren’t bullies who dictate terms to you. They work within your parameters and help to ensure that you will still be there the next time they need to order.
Manager and Co-Owner
iPROMOTEu/Chesapeake Promotion Corporation
It is a little more difficult to change the culture of the large client companies who are already in the habit of paying you in 120 days, but try offering a percentage discount if they pay early—say, within the first 30 days. For new clients—since the products we provide are so specialized and customized—it is perfectly acceptable to have them pay in advance—especially first-time clients—or use a percentage split like 60 percent up front, 40 percent due on delivery. The important thing is to establish the rules up front. Make your terms clear by adding them to your order confirmations and invoices, and add a statement that a finance charge will be added for paying late. Oh, and for the invoice ‘pickers’—don’t change the date on the invoice when you make edits—that way the due date will remain the same regardless.
Amanda Corey, MAS
Biz Mark, Inc.
You are the one that sets the terms for your clients and you teach them how to buy from you. If you don’t want to offer terms, then don’t. As a distributor, I worked with very large clients and they had no problem paying up front. In this age of online buying, people are used to paying for goods and waiting for them to arrive after the fact per the terms you set forth in advance. Quote shipping up front and put “No overs” on your purchase orders. Send a proof with a disclaimer that says “Production begins once proof is approved and payment is received.” You don’t have to charge the card until the order ships, just to avoid having to change the charge or issue a refund in the event of a problem, but at least then you are covered without having to chase clients for payment after the fact.
Green Banana Social (formerly Green Banana Promos)
We require prepayment from all new clients. It doesn’t matter if you’re a mom and pop or a Fortune 500—no exceptions. We then extend terms to clients based on order volume and financial stability.
For instance, we have one client that spends about $100,000 a year with us and they have a multi-million-a-year operating budget. They get net-30 terms and usually pay in 15. We have another client that spends about $5,000 a year with us and they have a $200,000-a-year operating budget. They get to prepay via credit card.
Extending terms is a decision you have to make and be comfortable with. Honestly, there’s nothing wrong with asking a client to prepay orders. (I’d recommend doing this via credit card and building those fees into your costs—it’s easier for you and the client.) But I can count on one hand the number of sales I’ve lost due to asking for prepayment, and I’m pretty sure those sales would have never been paid for had we not collected payment in advance.
Chris Clark, CAS
Radius Marketing Solutions
At our company, we do not allow customers to go to 120 days to pay. There are always going to be issues with a specific invoice, but not the whole account. We hold orders placed and withdraw terms in order for us to not lose in the long run. I think that a lot of this has to do with business relationships you have with customers. We strive to get to know our customers and build foundations on top of that. With that comes trust and knowing that our customer, if there is an issue, will reach out to us so we are able to help.
I think other companies should build relationships with their customers, make sure that the terms are clearly outlined, and stick to the terms. Withdraw terms if needed and hold orders. Customers are more likely to pay if you are holding an order for their customer and they need the order, than if you’re just releasing all orders and not getting any payments.
A/R Team Lead
Hub Pen Company
The best way to handle these companies in my opinion is to have an asset-based line of credit with your bank or finance company. Typically, lenders will base a line of credit on the outstanding receivables and inventory in hand. If the bank is lending money to you based on your receivables, an open invoice becomes something you can borrow against.
Of course there is a cost to this, and it is certainly important to identify what that cost is before making pricing decisions. Additionally, many of these customers who want extended terms are willing to pay faster with a discount, either directly or through a third-party financer. Again, this cost needs to be considered.
Paramount Apparel International
Do you have an answer?
A Distributor Asks: Someone referred me a possible client and asked if I pay a referral fee. Nobody has ever asked me for a referral fee before, and when I refer business to people, I never asked anyone to pay me. Do other distributors pay referral fees? If so, how do you calculate what that should be?
What’s Your Answer?
Email answers along with your name, title and company name by March 24 to Question@ppai.org for possible inclusion in an upcoming issue of PPB magazine.
Julie Richie is associate editor for PPB.