When your company is waiting for payment, you may be in one of four levels.
- A vendor will be paid first if a nonpayment can cause severe personal consequences. This might be a payment to the government for an employment tax. If the payment is not made, the owner of the business can be made personally liable.
- The second group to be paid from scarce funds is a vendor the company needs in order to stay in business. This could be utility companies or payment of rents and loans.
- The third group to be paid is made up of vendors that supply a product that sells well, is profitable, and has no returns or problems.
- The fourth group to be paid includes all the others. These are normally paid in order of the one that screams loudest. And, the longer you avoid collection, the less chance you will ever be paid.
Now, unless you hire my friend “Max the Hit Man” to do your collections, the best you can hope for is to be in the third tier of payees. Thus, in order to be paid with in terms, you must make a quality product that has zero problems for your customer, you must deliver the product quickly from receipt of order, the product must have great design and be desired by the end user so it “retails” or “turns” very fast, and it must be fairly priced. This means you are a true partner with your customer, the retailer. You are trying to make the retailer’s life easier and more profitable and the retailer is trying to keep you in business by letting you make a profit also.
You might think that because of terms or factoring, you will be paid no matter how you choose to run your business or make and deliver your product. So, let’s look at these two assumptions.
Terms and factoring
Terms are given to entice a customer to pay your invoice early. I have seen terms as large as 5 percent net 15 days or 5 percent 30 days. As many manufacturers don't put 5 percent to the bottom line, these terms are just ludicrous. A buyer looks at the total price of a product. Little consideration is given to the net. If you have built in a large discount percentage, you will appear to be overpriced. In addition, I suspect that the terms do not do anything but create a hassle. Most customers will take the discount even if paying late. Then you will have to decide to invoice them again for the discount taken or forget about it. Either way, you lose!
Factoring, the choice of many manufacturers, also has its pluses and minuses. A factor is only going to take a limited amount of risk on a customer. Let's say a factor has a risk assigned to a customer of $50,000. If you are the only manufacturer shipping that customer through the factor, you will be able to ship $50,000. If there are 10 manufacturers shipping that customer, all using the same factor, you will be limited to a $5,000 shipment providing the customer is paying all of them on time and equally as fast. If another manufacturer is having issues, it could cut your open-to-ship to zero. And, the factor could let you know the day your shipment is to go out that the customer has been placed on credit hold.
In addition, if you are not on the customer’s “A” list to pay, a simple communication by the customer to the factor stating that the products you shipped were not to specification will cause an immediate charge back to you and a deduction from the next payment to be made by the factor. This can easily cause a huge burden to you if you are living for that next disbursement from a factor. When this happens, your company will still have to be the collection agency and try to get your money.
I also think it prudent to pay a sales person one-third on shipment and two-thirds on collection. This idea is prevalent in many industries and keeps a salesman’s head in the game. A history of payments, graphed, will also let you know if a customer is moving you to the fourth tier. This gives you a signal to find out why and what action is required.
Credit card option
In the last few years, most of the major credit card companies, particularly American Express, have developed products for businesses. Similar to an individual account, a line of credit is established. You would have your bank set up a card processing account for your business. You would then ask for the card information when you processed the order, put a hold on the amount when the order goes into production, like a car rental agency, and then charge the card when the order is shipped. Your customer can still file a complaint with the credit card company who will charge back the invoiced amount to your account.
I would advise you to ask your customer to obtain a credit card you can use for the transactions between your companies. If they demur or refuse to offer a credit card for payment, then you should ask yourself which tier you are in and how far back in line you will be for payment. In essence, you are certainly not a bank or lending institution. You are in business to make a good salable quality product and ship it as promised. If you accomplish this task, you deserve to be paid for your efforts immediately on shipment. If your customer wishes to delay payment for several weeks or months, then, by use of their credit card, they can certainly delay their payment by paying the standard credit card fees.
I am sure I'll hear about the 3 percent possible fee you will be charged by the credit card processing companies (which is negotiable depending on volume). If you think about it, you have a lot of costs including the cost of your money, the cost of collections, bad debt costs, administrative people collecting, the use of your sales people's time in attempting collections, etc. Three percent could be a bargain.
Once more for emphasis: The first to be paid will be a retailer's partner, delivering great salable design, with consistent quality, on time, and at a fair price with superior customer service.
Given today's business climate, there is one thing for sure and certain I would advise. Do not carry accounts yourself, even with credit insurance (How reliable is the insurance company?) If you are able to do this, you should be in another business besides furniture. What could appear today to be a sound and going business could, overnight, be crushed by the decision of some bean counter in some bank who is now rewarded for their newly found risk aversion. I would also say sadly, that there will continue to be, over the next few years, some major retailers and manufacturers forced into bankruptcy because of the present credit situation.
As the watch commander on the old police show on television said, “let's be careful out there.”
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