Gini Dietrich

New 120 Payment Terms from Big Brands Require Agencies Play Bank

By: Gini Dietrich | June 24, 2014 | 

New 120 Payment Terms from Big Brands Require Agencies Play BankBy Gini Dietrich

Earlier this month, Mars (the candy company) announced they are going to seek longer payment terms with their vendors, including PR firms and advertising agencies.

The move – which now states they will pay in no less than 120 days (that’s FOUR months!) – follows the same policies recently put in place by Proctor & Gamble, Johnson & Johnson, and Anheuser Busch.

The reasoning in stretching out payment terms is that frees up cash – as much as $2 billion in some cases – but at what expense?

It also means many other big brands likely will follow suit…which could easily decimate some of the boutique agencies that aren’t hired as firms as records, but to provide the extra creativity and flexibility the global firms cannot produce.

An Arment Dietrich Story

When I started Arment Dietrich, I didn’t know there was any other way to do business, but to play bank to our clients.

I came from the global PR firm world, where it was commonplace to host multi-million dollar events, pay for them, and then get reimbursed months later by our clients.

I thought we had no choice.

We hosted events, media tours, deskside briefings, and more for brands you’d recognize. We had to hire people to do the work, and the bank was willing to loan us the money to do so because we could prove the money was coming. Eventually.

Suddenly, we had borrowed $362,000 against our line of credit…with no end in sight. We were paying interest on $362,000, not for 30 or 60 days, but for 90 or 120 or sometimes even 180 days.

We didn’t recoup the interest. It nearly bankrupt us.

Today we don’t even recommend those big out-of-pocket kinds of tactics unless we know the client will pay for them without going through us. It’s not a very strategic way to do the best work for our clients, but we just can’t afford to do it any other way.

You Don’t Have to Play Bank

The good news is you don’t have to play bank and you don’t have to agree to those payment terms.

Sure, there will be some purchasing managers that tell you to go fly a kite when you’re in the middle of negotiations. It’s up to you, at that point, to determine whether your business can afford to take them on.

It’ll be difficult to not let the money lead your decision-making. I know that from experience. So you have to put that aside and think, “Can we keep the business going if these guys don’t pay us for four months?” Bring in your financial people and really look long and hard at the situation.

There also are some other things you can do.

Five Tips to Help Small Agencies

  1. Negotiate up front. We have a Fortune 50 client who has 90 day terms, which are just too long for us. When we were hired, we were very clear that we could not begin work until a deposit for the first month’s work was received. It meant we didn’t start work until three months after we were hired, but now we get paid every 30 days because we began the payment cycle before the work began.
  2. Get paid before work is complete. The deposit covers the first month’s work and the recurring payments cover the work for the following month. As an example, let’s say you are hired in January. You get your first payment on April 2. That covers work done in April. The payment received on May 2 covers work done in May. If you let the April check cover January and the May check cover February, you’ll always be behind.
  3. Stop work when payment is late. Anytime a payment is late, you must immediately stop working. It’s not easy to do. You want to believe your clients will pay you…and 99.9 percent of the time they will. But when they’re under pressure to pay you if the work isn’t moving forward, they’re more willing to get it done. That said, this occurs mostly with smaller companies. The global brands have everything automated so, once you begin the payment cycle, you get paid.
  4. Use the line of credit strategically. Banks are beginning to loosen their borrowing terms again, but be very strategic about how you will use your line of credit. It is not to be used to play bank for your clients. In fact, if you negotiate up front and you get paid before work is complete, you won’t need the line to pay your own bills while you wait to get paid. You may need it for more strategic business opportunities, such as mergers or acquisitions, growth, or producing new products.
  5. Don’t be afraid to cry uncle. While many clients don’t understand how hard it is to run a small business – after all, they get their paycheck no matter what – if you get into trouble, it’s okay to cry uncle. They will understand if you very rationally explain the position they have put you into and ask how they might help get you out.

Running a small business is not easy. It’s not all fun and games. It’s one of the hardest things you can do in your lifetime. And watching the big brands do things like extend their payment terms to 120 days doesn’t make it any easier.

The good news is, you control the destiny of your business. If you want to work with these kinds of companies, what kind of risk are you willing to take?


About Gini Dietrich

Gini Dietrich is the founder and CEO of Arment Dietrich, an integrated marketing communications firm. She is the author of Spin Sucks, co-author of Marketing in the Round, and co-host of Inside PR. She also is the lead blogger at Spin Sucks and is the founder of Spin Sucks Pro. Join the Spin Sucks   community!

  • At the little weekly newspapers I ran, we’d run into this, with agencies, usually the larger ones but occasionally the small runs, stringing us out on payment for months. They always said we’d get paid when they got paid, but in the meantime, we were suffering.

    Unfortunately, if the client is slow to pay the agency, and the agency is slow to pay, many vendors, themselves small businesses, suffer as well. It’s a bit of a vicious cycle where you have plenty of revenue but no cash flow.

    Your point number 3 is the most important in my view. With that small paper, as soon as we stopped running ads (doing the work) because payments were late, the checks suddenly started appearing.

  • ClayMorgan That’s definitely what we found. We had all this debt and couldn’t keep up with paying our own suppliers. It is a vicious cycle and it starts at the top with these big brands. I don’t know how we get it to change. I understand extending the payment terms equals lots of cash flow, but they aren’t going to have suppliers when it comes down to it.

  • ginidietrich ClayMorgan I’m often reminded of the casinos near Tunica, Miss., just south of Memphis.

    When gambling was legalized and the casinos flooded in, a couple of Memphis ad agencies went broke and shut their doors while handling more advertising than they ever had in their history. They couldn’t fund the casinos’ slow payment terms.

  • 120 days is just insane, and you’re right, Gini, all this is going to do (potentially) is harm the innovative, risk taking boutique firms who can’t ‘play bank’. Way to shoot yourselves in the foot, Big Brands. Welcome back to the late ’80’s. Booooring.

  • Ridiculous. I assume these companies demand better terms than 120 days from the customers who pay them. And, yes, as Clay said, this causes cascading problems for all the contractors, subcontractors and vendors down the line. 
    I’m doing more billing in advance, or 50% upfront on a project. This push to squeeze vendors just creates unnecessary tension in the working relationship, which must eventually effect the work in some way. Bleh.

  • I am no business owner, but I believe it´s ridiculous and beyond shame to be paid for the work you do after 120 days! If that´s the way business world works, maybe it´s time for a change.
    I can´t get out of my mind this question: “You (client) need the work now, right?! Then why do you think I would need my money after 120 days!!!”
    Yes, I know that´s the way things work, but that doesn´t make it right.

  • belllindsay Well said Lindsay: “Welcome to the 80´s!” Instead of spending so much time on crap, these guys should invest their time in being more creative, doing the things that count and giving back to the society (not their pockets).

  • This is where having someone with a CFO hat really really helps. We have talked offline about a lot of this stuff. It is uncertainty that is hard to measure. If I knew 120 days was going to happen….not say 90 to 180 spin the wheel, I can present pricing to match the GM I want to make. You want 120 vs 90 days? Ok I am raising your rate 10%.

    There is also two sides to receivables. If you are cash flow poor it sucks because you need to free up that money you are properly owed for investment (pay bills, workers, r&d maybe etc).. If you are cash flow rich a late fee you know will be paid will return better than a savings account. Just 0.5%-1% per month crushes the return on idle cash in the bank. So your contract should reflect your reality (make it easier to get paid or make the return worth waiting).

    I think your tips are great and help reduce the uncertainty. I think these brands are nuts because it means they will get charged more for their Marketing and PR. 

    This also to me screams of having someone clients need that they don’t have lots of options for elsewhere. You have no power as a me too business.

  • I’ve been practicing some of these tips. I plan to add the other ones ASAP.

  • Jennifer Nash It’s not easy. You need money to live on and grow your business, but you also can’t jeopardize its future.

  • ClayMorgan Wow.

  • corinamanea belllindsay What’s interesting is how quickly history is repeating itself now. Cycles used to take generations. Now they take five or 10 years. We saw a lot of this in the early 00’s. Then the small agencies were bought up by the big ones. That’s coming next.

  • ginidietrich Yeah. I’ve turned down some clients that wanted to extend terms beyond what I could handle.

  • RobBiesenbach I just saw my friend Steve Cody wrote about this very topic. He looks at it slightly differently – how much money it costs to get paid by those clients who pay late.

  • corinamanea Imagine working for a company and only getting paid after working there for four months. That’s essentially what’s going on.

  • Jennifer Nash And that is sad.

  • Howie Goldfarb I didn’t think about the late fees. That’s a good addition to the list. Charge late fees for anything past 30 days. You’re right … you’ll make more money that way than in a savings account.

  • ginidietrich Exactly!

  • markinit

    Gini-thx for being bold enough to float this Topic. Your suggestions are all useful. As an agency biz owner  for many yrs-and having been through a few up and down economic cycles, I feel I can now distinguish the differnence between the “true blue cannot pay quickly “vs. the “use the economy as a crutch” clients. As we love to pay all our suppliers quickly as a measure of respect this topic is important. This also means we recognize the great clients who most always pay on time. Keep up the good work….

  • Big companies like to work with big companies. So they put in all sorts of underhand discrimination. It is something we tackled here in the UK in government procurement.

    What it usually does is simply put prices up. And lose the client the choice of the best agencies. The clever way of dealing with it is to tweak your own terms. Make next day response a premium at 20% extra. Start making hours billable which weren’t before. 

    Tweak your client mix. Tell your slow paying client you only have room for one “extended terms” client and it is their competitor or another prestigious name, not them. Make sure they know your value and that you choose, not them.

    And finally, keep a balance – it is easy to get sucked into the “we only deal with big clients” ego trap. But it always ends in tears.

  • I did see that, yes. The squeeze is definitely on. As discussed elsewhere here, I think charging interest (or incorporating it into the fee) is a smart way to go.

  • terreece

    ginidietrich corinamanea Organizations have been doing it to writers for years. That’s why writing for online pubs became so popular, they paid quickly, often electronically as opposed to waiting for checks that seemingly always fell through the cracks for another 30 days. The downside is writers then sacrificed higher rates for quick pay.

    Our company changed our billing this past year and the times we’ve made exceptions we were screwed over. It’s tough to stop the work. I’m always so committed to the work and pauses jeopardizes the momentum that it’s painful to see it stop, but it’s easier and faster than making repeated calls and emails for payment. 

    Great tips Gini!

  • In my ad sales days this 90-120 day business was part of why I sometimes didn’t see commissions on ads that ran in January until Fall or Winter.

    Company wouldn’t pay me until they got paid–all part of the trickle down effect.

    I can tell you that some of the bigger agencies do this too. They grab as much cash up front from their client as they can and then they sit on it and try to earn as much extra from interest as possible.

  • Great advice ginidietrich! When I started my own consulting business (well, started as more of a freelancer and evolved), I was very clear as to the payment terms. Most of my clients were PR agencies that paid within 30-60 days at that time . I was clear that I’d only work for them if they agreed to more flexible payment terms at least until I was more established. Now when I sign new clients, I won’t begin working until I get a significant payment upfront. Fortunately, most of my current clients pay their invoices immediately. A couple need net 30 but I can handle that and it’s the price I pay for wanting them onboard. I’ve only had one client I had to chase for payment and that was during the height of the mortgage crisis. They were a European company pretty hard hit by the tanking economy. 

    I’ve often had colleagues complain about not getting paid, etc. but after some probing I’ll learn they either didn’t establish terms with their clients or were extremely flexible. Thanks for your blog post. it’s a great one to share when these types of questions surface.

  • Yes, the agencies do this as well, especially at year-end to boost their numbers.

  • SusynEliseDuris

    Great post, Gini. It brought me back to my old corporate finance days. 🙂 

    I have found that in recessionary times, especially, people do crazy things when money is in the picture, so it is wise to protect yourself and your business but do it in a way that clients understand. That’s why M4 Communications started early with requiring half payment up front and half at end of project. Actually, requiring some type of payment up front is just a smart way to do business. Also, sometimes, we’ll have clients with major milestones that we’ll require a portion of the payment after certain milestones have been met. I have yet to meet a client who has had an issue with our payment structure. 

    I’d add 1a being “Manage Expectations Precisely”. I know you mentioned it in Negotiate Up Front. It’s very important that clients know what they are getting and when and when they are expected to pay. I think it will help them understand and accept payment requirements. It’s always good to start the relationship off on a solid footing.

    And, I agree, be very strategic with line of credit. This also applies to SBA loans, etc. You don’t want to be caught with your pants down…

  • terreece I’ll come back and comment on the blog stuff, but wanted to say HAPPY BIRTHDAY!!

  • terreece

    ginidietrich terreece Thank you girl!

  • I love when you write posts like these. This type of straight forward and actionable advise is so hard to come by when you are starting and trying to run a business. And so unfortunately we all learn the hard way, often the really hard way (everyone who speaks from experience raise their hand)

    (hand raise)

  • KateNolan

    LauraPetrolino Does this mean you’re still waiting for a paycheck? 😉

  • KateNolan

    All excellent points!
    One of our vendors is also a supplier of ours, however the terms they paid and the terms they accepted were different. It was kind of fun when they called and asked why we hadn’t paid them yet… 🙂 We also have a lot of customers who play the “I haven’t been paid” card and all we can say is, so you want us to not pay our suppliers because you aren’t paying us? How long do you think that will work?
    In other words it happens (or will) in a lot of industries, I suspect. However, I’m on #teampayup and not #teamhoard; it’s just respectful of the companies you do business with.

  • KateNolan LauraPetrolino LOL

  • All very interesting, Gini! I didn’t know you could cry up to the big companies like that. Do some of them turn down your requests to help you, even though they put your company in such a position?

  • JRHalloran It certainly depends on the relationship you have. I always try to negotiate that stuff upfront, but there have been two situations in our nine year history that I’ve had to ask clients to help us out because of the precarious position they’ve put us in.

  • KateNolan I want more people like you out there! We always try to pay within 15 days, but sometimes the cash flow makes it impossible. And I feel like a schmuck when I can’t pay our vendors that quickly.

  • LauraPetrolino (hand raise)

  • corinamanea KateNolan LauraPetrolino Yes, I keep their paychecks as punishment. You say mean things to me? No paycheck for you!

  • SusynEliseDuris I’ve also found saying, “Do you have to wait four months for your paycheck?” works pretty well, too.

  • Joshua Wilner/A Writer Writes I suppose that’s a strategy.

  • PeterJ42 We talked about this on our recording of Inside PR today and Joe agreed with you – big companies beget big companies. I also love the idea of making hours billable that we’re before. We always joke here that clients should be billed for my bike riding time because I always come back with really good ideas for them after I’ve spent a couple of hours on my bike.

  • makeaner Even then it sometimes isn’t easy. Then you have the clients who keep promising to pay and don’t. It’s a never-ending battle.

  • markinit Thanks! This is an important topic…not just for agencies, but for small business worldwide. The trickle down effect is difficult and it doesn’t encourage innovation or new job creation through entrepreneurial spirit.

  • SusynEliseDuris

    ginidietrich Ha, Ha! That, too! 🙂

  • ginidietrich corinamanea KateNolan LauraPetrolino She does! I’m typing this from my cardboard box right now. It’s all I can afford until she finally pays me. Oh woe, oh woe….oh woey, woey, woe! 

    *and important side note: the hand raise was for prior to joining Arment Dietrich.* 🙂

  • Great post and comments. I just have to chime in and say that it is SO HARD to stop working when a client is late with payment!! That is something I personally struggle with.

  • TaraGeissinger It is hard. We struggle with it, too. In fact, Laura and I just had this conversation a couple of hours ago. A client is 90 days past due. A client who always pays on time and just needs a little help with their broken accounts payables model. Do we trust them to make it up or do we stop work? It’s hard.

  • LauraPetrolino From the cardboard box that doesn’t have Internet because of your one woman stand against big cable.

  • ginidietrich LauraPetrolino HAHAHAHA! Precisely!

  • AbbieF

    We require the first month’s fee upfront  before we get started. And the next month’s invoice is sent at the same time. Then we invoice on the first of each month.  No payment by month’s end, no work the following month.

    It was an interesting shift when we went from end of month billing to first of month billing (majority of our clients now are that way). One day difference but switched the thinking from paying for work completed vs paying forward.

  • ginidietrich  Ouch. How did that work out? Did they actually help or did they refuse?

  • Patricia Toth

    That’s unreasonable!

  • Lori Buscaglia Wilson

    Ugh cash flow makes us crazy! Great tips!

  • ginidietrich TaraGeissinger I think that is why we are always sure to pay our vendors quickly. We know how it feels to be on the other side!

  • Ellie Pierce

    I’d say that’s a fair word for it!

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  • I benefitted tremendously from this post ginidietrich , as well as the discussion you had on Inside PR with Joe and Martin. Since going out on my own at the end of last year, my biggest learning has been on how to actually get paid for work completed. I certainly wasn’t expecting this to be my greatest challenge so far. I’ve made some mistakes in the process and will take into account some of your tips highlighted here. Thanks for sharing these lessons.