KnowThis Blog Postings
- Published on June 08, 2012
- Posted by Paul Christ
Small Firms' Big Customers Are Slow to Pay (Wall Street Journal)
Getting to the point where a marketer convinces a buyer to make a purchase is often an exhausting experience. This is especially the case for business-to-business transactions, where dealing with customers often requires several key business decisions be made and a few unexpected hurdles to climb over before the customer agrees to buy. It is no wonder marketers selling to other businesses often feel a tremendous sense of relief and satisfactions once the order is placed. For any company that has obtained a buyers’ commitment to purchase, the time and energy spent leading up to the sale certainly gives good reason to celebrate.
Unfortunately, such celebrations may be premature. Why? Because a sale is not considered complete until the buyer makes payment and, depending on the market, while receiving payment may seem like a relatively minor issue, it often ends up causing headaches as many buyers are slow to pay. Consequently, experienced marketers often learn that obtaining payment requires almost as much effort as the sale itself.
To help address this, marketers have at their disposal several options to encourage early payment or, for some, to discourage late payment. For instance, to encourage quick payment marketers may offer a discount if a bill is paid within a certain period (called cash terms). Alternatively, they may add a penalty charge if the bill is not paid within a reasonable time, for instance, if not paid within 60 days.
However, the effect of these payment incentives is declining, particularly when large volume buyers are involved. As seen in this story, large companies often ignore any payment terms that are offered and simply pay their bill when they get to it. They are especially likely to do this if the seller is a small company who has little choice but to accept the large company’s payment methods. While a small marketer could threaten to stop selling to the large buyer, this is often not an option, especially if the buyer represents a large portion of the small company’s revenue.
Additionally, as mentioned in the story, another key effect of slow payment is that it forces others in the supply chain to limit their own purchases which appears to be impacting expansion plans of smaller firms.
Mr. Sheth's seven-person Anatta Design has been forced to postpone hiring and expansion because of the longer wait for payment. Last year, for example, it sent a $6,600 invoice to an online retailer for several months' work redesigning an online "shopping cart." The entrepreneur, who says he didn't have a credit line to fall back on, received payment in full 404 days after the date on the invoice.
What other techniques can a small company utilize that may encourage a larger firm to make faster payment?
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