Establishing payment terms

One of my posts sparked a very good response. As I was composing a comment, I realized that the comment was long enough to be a separate posting, so here it is.

Everyone bitches back and forth, retailer to manufacturer etc…But the most prevalent complaint and annoyance most brands have with retailers is that getting paid within their set terms is usually an adventure. Yes the are a FEW retailers that honor their commitments, but why do you think a lot of brands are forced to retail their own stuff ?

Well, the issue is that a large number of DEs offer retailers Net-30 payment terms when they should not. I see far too many DEs who make that mistake (I cannot reiterate that far too many DEs make that mistake).

My experience has been that most of the companies that offer terms are either large enough to carry the invoices (and have a dedicated collections or accounting department to handle the management of invoices) or they factor their invoices. There are a handful of factors that specialize in the apparel industry and most manufacturers, fabric mills and converters, and other industry suppliers that factor, use these companies.


What happens with DEs is that they are so eager to get the business, they get bullied (or sometimes not even bullied, just persuaded or asked) into offering terms. They talk about running a Dunn & Bradstreet (D&B) report but that won’t tell you a whole lot if the company is not dealing with vendors who report to Dunn & Bradstreet. Kind of like the way a credit report won’t tell you if a person pays their light bill (in most cases). Let me reiterate that:

May DEs are so eager (and sometimes desperate) to get into a store that they offer payment terms when they should not. Matter of fact, a lot of mistakes I see DEs make is because they are eager to get business.

When you’re new, unless you have someone seasoned guiding you, you have no clue which stores have a good payment history. This is where experienced industry sales reps have an advantage, as your sales rep will definitely know which of their store accounts pay and which do not (as they don’t get paid until you do). There are some prominent showrooms that build their reputation on knowing so much about the retail landscape in their area, they can steer a DE into the right stores and help them avoid bad stores with a good image and deal with stores that have “payment issues”. Many stores use their supplier’s terms to finance their inventory, most people in this industry are using the benefit of Peter’s payment terms to pay Paul. I hear the “good” stores are the worst at this.

Now I doubt anyone here would let a consumer buy on terms, but they seem to think that all retailers deserve the same type of treatment when it comes to issues like that and there is little evidence to suggest that they do. Unless you are willing to battle it out in court, there is little that a DE can do when a store refuses to pay. You cross state lines (say you’re in Texas and this store is in Arizona) and it’s even more complex for you to take them to court. “But I have a contract, I have a signed purchase order where the buyer agreed to my terms of sale” is often the first rebuttal (and many people don’t have that as they took an order over the phone). But again, contracts become enforceable when you take legal action (i.e. go to court), there are no contract police. I have asked quite a few DEs about this “what do you do about those retailers who do not pay” and they have all replied “There is little I can do. Sure I have some recourse, but when it’s a small invoice, It’s often not important enough to devote the resources to it.”

DEs should be getting paid upfront. With a credit card and signed authorization, with a check or with COD (which is the least preferable of upfront payment methods because those checks can bounce by the time you get to deposit them). If you’re not swimming in cash, you should not offer terms.

There is a general nature to receivables (invoices you need to collect). There is often a lot of available data, that may vary from industry to industry, about what percentage of invoices are paid within the terms, and then what percentage are aged (overdue) and for how long. It is an expectation that when you offer terms you will have certain percentages of past due 30,60,90,120 days and more and a certain percentage that you never recover. A quick google of the term “accounts receivables” yields this link. And having taken more accounting classes than I care to discuss, in general, this is what an accounts receivable aging report looks like. It is a business anomaly to have one where all accounts are current.

If it was uncommon for customers to pay late, factors would not exist. I went to one seminar on starting an apparel business where the owner actually showed her receivables aging report. This is a company with about $15-20 million in annual revenue. Everybody has aged receivables.

Having said that this is a general business issue that comes up when you offer payment terms, no matter what industry you are in. It’s difficult to understand when a DE acts surprised that some, or many, of their accounts do not pay on time. A simple quick read of a small business accounting book would yield this information. Asking other DEs would as well. It’s general industry/business knowledge that it’s hard to collect when you offer terms. Since most DEs are not good at collecting (you design, remember) and many are not incredibly confident when dealing with retailers, you don’t make the best collection agents (generally) and often don’t have enough time to do it.

Now I can sit here and say that retailers are crappy for not paying their bills, which is true, but the reality is that in general, that’s what happens when you offer terms across industries. And your largest companies (like large regional stores or department store chains) are the absolute worst.

So if any DE is reading this post, take it to heart. Only offer terms when you can afford to not get paid on time. Only sell to department stores if you can afford to get paid very, very late and then not in full (as they are notorious for charge backs). Never finance a store’s inventory just to get your foot in the door, as many DEs do. Have the confidence that your brand will sell well enough to mandate payment upfront. The stores that will not buy your brand because you won’t offer terms are likely to be the ones who have a hard time paying invoices.

If you plan on growing to have a decent size of receivables (say $500,000), build a buffer into your wholesale price just in case you decide to factor your invoices. If you don’t want to factor, ever, and you’re pretty slick at financial analysis, built in a buffer into your wholesale price to “cushion” against the receivables you don’t collect upon. This is why costing is crucial.

Now sure, some stores will really need terms. How have I seen DEs resolve this? They offer terms after X number of invoices are paid upfront. For example, after three pre-paid invoices, the retailer can apply for terms. At this point, you have established a relationship with the store and terms are not being granted to a new account that you know little about.

Now on the flip side, as a DE, you’d be surprised at how many fabric mills and converters offer net-60 payment terms (I haven’t seen this as much with jobbers). If you’re lean and collecting payment from your retailers before shipping, you are basically paying for your fabric after you get paid for your orders. I bet fabric mills could complain all day long about DEs who don’t pay on time.

Everybody’s using Peter to pay Paul in this industry :)

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