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
- 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.
- 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.
- 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.
- 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.
- 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?