Payment terms are right below price on the list of important items you will negotiate. On one hand, I think some creative firms don’t think creatively enough about using payment terms to get an otherwise tricky deal done, but on the other hand, some larger clients can be ruthless at imposing arduous terms on their agencies and other suppliers. Let’s look at how to leverage the former and defend against the latter.
Creative Use of Payment Terms
You’ll occasionally find yourself in situations where a client or prospect invokes the affordability objection. “I’m not saying your services aren’t worth your price, we just can’t afford that price.” As far as objections go, this is a nice one to deal with, especially when the value to be created is clear to both parties and your price falls within the range that the client thinks is “fair” compensation for that value creation.
In such situations, creative payment terms are often the first tool to come out of the toolbox, but they have to make sense for you first. In extending more generous terms, you’re increasing your risk and negatively affecting your cash flow. If the project has high flow-through costs, such as contractors, production or media, all of whom need to be paid in 30 days or less, then your risks increase further. There’s no requirement to negotiate on terms if it’s not in your best interest to do so, so proceed with the following only if it makes sense for you.
Trial Close First
If you are open to negotiating on terms, make sure to trial close before you give anything away. A trial close is an “if-then” question. It might sound like, “If I could deal with the affordability issue through more generous payment terms, would that be enough for us to move forward on this?”
This will ensure you surface anything else that might be in the way of getting a deal done before you start making concessions.
Let’s say the client responds with, “Depending on what you can do, yeah, I think we might be able to make it work.” With this green light, you start thinking through your options.
Variables for Rethinking Terms
Here are some things to consider as you craft more generous payment terms.
All New Clients Pay Something in Advance
As a matter of policy, all new clients should pay something in advance before the project begins. I’m aware of no reason to violate this policy. I think 25% of the fee portion of the first phase of the engagement is a minimum requirement in normal circumstances, but in non-standard situations that number can go out the window as long as the principle does not: every new client has to pay something in advance before you begin.
Financing Requires Finance Contracts
If at any point in the engagement you are going to be upside down beyond 30 days then your clients should sign a finance contract that explicitly states their financial obligations to you. This is doubly important if your payment terms extend beyond your involvement. Get your lawyer involved.
Consider Charging More as You Extend Terms
If you are financing your client you should probably get paid for it. If affordability or cashflow is the client’s objection, and not price, the client might be willing to pay another 5%-20% on top as long as the terms are favorable. In this way, terms can be win-win for both parties.
Protect Your Intellectual Property Rights
All your contracts should clearly state that any IP rights transfer to the client only once you are paid in full. Again, consult your lawyer.
With these guidelines in mind, go ahead and get creative about payment terms that help the client and that are acceptable to you.
Defending Yourself From Onerous Payment Terms
While non-standard payment terms can be a creative negotiating tool with more entrepreneurial clients, with larger clients, non-standard terms are usually something to be avoided. Often, they are demanded by the client’s procurement department, and the trend for these demands is not encouraging.
Consumer packaged goods (CPG) companies and other large advertisers have been moving the 30-day payment goal posts out to 60, 90 and 120 days for a few years now. (I have a future post coming on the surprising causes of this trend, and it’s not all about the role of procurement. Make sure you’re subscribed to get notified when that drops.)
Payment Terms Jumped The Shark in 2022
In October 2022, Keurig Dr Pepper (KDP) ran a pitch for a new PR firm in which their RFP explicitly stated that participating agencies had to agree to 360-day payment terms (you read that correctly—a few days shy of one year) or seek third-party financing at their own cost. (Leah Power and I are doing a 20% –The Marketing Procurement Podcast episode on this event and the larger topic of increasingly onerous payment terms. It will be out in the Fall of 2023. Subscribe wherever you get your podcasts.)
It’s my hope that this KDP pitch will go down in history as the moment that “financial engineering” jumped the shark, causing a lot of red faces among marketers and their colleagues in procurement and finance. But the reality today is you are facing growing pressure from your largest clients to accept increasingly onerous payment terms and you don’t have to accept them.
The largest holdco-owned agencies can and often do accept these terms, in part, because it can be a competitive advantage against less financially sophisticated independent firms. They accept that part of the value they offer is lending money to some of the world’s largest companies at cheaper rates than institutional lenders. It sounds glib but it’s true.
Three Ways to Push Back on Lousy Terms
You don’t have to be in the banking business, though. Here are three ways to push back. If you’re able to layer in all three, you’re in an ironclad defensible position.
Play the Small Business Card
“I understand the trend for organizations like yours is to increasingly look to your suppliers to finance your operations, but we’re a small business and we can’t do that. You’ll have to get your banking done elsewhere. We need to get paid in 30 days.”
Just because the client asks or even appears to demand onerous terms, it doesn’t mean they won’t negotiate or capitulate altogether. No good client wants to impose economic hardship on their agency, and everyone understands that small businesses have different operating realities than larger ones, so do not think twice about playing the small business card.
Play the Diversity Card
Many large marketers have policies around hiring or at least considering minority-owned agencies. The marketing procurement world is aware that they cannot preach DEI on one hand and then force these, usually smaller, businesses to take onerous terms on the other hand. And yet they will still ask or even appear to demand onerous terms from everyone, but they will back-pedal almost immediately when confronted with the DEI contradiction.
If yours is not a minority-owned agency but it is a small independent competing against large multinationals then you do have some “diversity” leverage. Before DEI was on the public radar some large marketers routinely invited small, independent outlier agencies to compete for their business against the usual roster of large shops. One such marketer confided to me that “the mistake these small firms make is they try to look large, when they really should be leaning into their ‘smallness’ that got them to the table in the first place.” Be different. Be small. Demand to do business on terms that work for small businesses.
Adopt a Cash Neutrality Policy
Cash neutrality is the idea that nobody makes money on the money across the value stack. To preserve a healthy marketing ecosystem, everybody gets paid on time and one party is never financing another. That means 30 days or less for everyone.
So, if you were to adopt a policy that says “we pay everybody—all our suppliers—in 30 days or less because we do not want to create unnecessary financial hardship for the contractors we hire” then you now have the moral high ground to say to your clients, “therefore, as a matter of policy, you pay us in 30 days or you pay a finance charge.” That’s the way business used to be done, and the way it should be done again.
When imposing greater than 30-day terms on you, the client is largely washing their hands of the downstream consequences. Your cash neutrality policy reminds them that there are consequences and that you are the responsible party who is going to stop the cycle of abuse. You are the adult in the value stack who says, “No more. This ends here. We’re going to move to something that is fair for everyone.”
When large clients hit you with onerous payment terms it can sound like an inviolable commandment written in stone, but it’s not. It’s just another negotiating point, and you have the moral high ground. Push back.