How to handle extended payment term requests from agency clients

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Chip Griffin: Hello and welcome to another episode of the Agency Leadership Podcast. I’m Chip Griffin.

Gini Dietrich: And I’m Gini Dietrich.

Chip Griffin: And Gini, I think we need to talk about, you know, how long it takes you to pay me for my time on this podcast.

Gini Dietrich: Okay, no problem.

Chip Griffin: Right after this.

So, yeah, I mean, I feel like I’m always sitting there going to the mailbox looking for my check and it just never shows up.

Gini Dietrich: Well, first of all, the fact that you’re going to your mailbox to look for a check says something. Secondly, you’re not going to get a check.

Chip Griffin: What?

Gini Dietrich: Sorry.

Chip Griffin: But I, I thought the deal was you were paying me to be part of the show. No, darn. All right.

Gini Dietrich: Well, now that you know that bye bye

Chip Griffin: and that concludes this episode.

Signing off forever. No, but I do think it is, it is helpful for us to talk about payment terms, because this is something that comes up all the time. I’ve had a number of conversations just in the last few weeks about it. It’s a question that came up in the Spin Sucks community recently as well. But, you know, trying to figure out what payment terms to accept as an agency.

I think we all have our defaults, and we should talk about that, because I think some people are way too lenient in their default payment terms. And I think people should be more aggressive with what they’re setting out on the table as the agency. You know, in lieu of whatever the, the client may want, but sometimes clients will ask for even more than the agencies are offering.

And so how do we handle that? So how would you like to go about doing this? What are your standard payment terms?

Gini Dietrich: Well, ours, ours are 30 days. and I don’t accept anything more than that because my feeling is number one, I have people to pay, including myself. Number two, we’re not the bank. And number three, you don’t go into a restaurant and order dinner, have dinner, and then a month later pay for it. Like, that’s just not how it works. So, I understand that, you know, in the business world, it’s a little bit different in your invoicing and, you know, doing that, so it takes some time. But, I won’t accept anything less, more than 30 days, because it’s, it’s just not acceptable for us to be able to run our business in, in that way.

I just, from a cashflow perspective. And I, in the past, have made the mistake of just letting clients do what they want and, you know, getting 90, 120, 150 days behind and suddenly you’re diving into a line of credit or you’re getting a loan to, to pay your bills and you’re not getting paid and that’s just not acceptable or not the bank.

So I no longer accept anything longer than 30.

Chip Griffin: So since. I know a lot of agency owners don’t have a background in finance or these kinds of things. Let’s talk a little bit more clearly about what we mean by 30 day payment terms, right? Because I think these terms get thrown around a lot. So let’s, let’s, let’s take a real world example.

So you’ve got a client that you’re going to be working for in March. When do you send the invoice and when is it due?

Gini Dietrich: So the way we do it is if we sign the, the client right now, we would send the invoice right now and we require a payment upfront. So usually it’s a month’s worth of retainer upfront.

Along with the signed contract before we will start work. So if they have 30 day terms or they have 45 day terms, that’s fine, but we’re not starting work until we get a check or a wire transfer. We don’t get checks anymore. but that, and that’s the way that we work. And there have been occasion, especially with really large companies.

We’ve worked with some of the Fortune 5, that they have, you know, 60 days or 90 days, 90 day terms. And I have said, listen, that’s fine. But we’re not starting work until we get a payment. And typically even the big guys will figure out a way to get you up, get you into the system and get you started and get you a deposit so that you can begin work.

And then even if they have 90 day terms, you have three day, three months of deposit upfront so that you’re always working in a way that it works for you. So those are the ways that I sort of work around it. and depending on what their payment terms are, we may do more than a month in advance, but we definitely always ask for a month in advance and we will not start work until that happens.

Chip Griffin: I think that’s really important to get at least that initial payment before you do any kind of work, whether certainly if it’s a project, if it’s a project, a hundred percent.

Gini Dietrich: Oh, for sure. Yeah.

Chip Griffin: You know, if it is retainer, I would still prefer to get it up front and that should be your, your default standpoint. But I think that, you know, rather than simply throwing around 30 day terms, I think it’s really important to understand exactly what, what you mean as the agency and what the client means by it, because your 30 day terms may not be the same as theirs. Because many organizations, when they say, you know, we have 30 day payment terms, what they mean is, you know, 30 days from the end of the month in which the services were rendered, right?

That is a very common way for, for companies. If they say 30 day payment terms, what they mean is that the work that you did in March will be paid at the end of April. Yep. So, you know, you need to, avoid that and, and that is really 60 day payment terms at a minimum, if not more, frankly. Because I’m of the mindset that for most retainer based work, you should be paid by the first day of the month during which you’re providing the services.

That should be your default position as an agency. So you should have the March fee in hand before March starts. As you note, there are ways around this where you can get a larger upfront. You know, you can call it a deposit, you can call it whatever you want, but, you know, so that you’re stacked up in such a way that even if they slow down on their payments, you’re still being made whole because of that initial payment.

But, you know, you certainly want to be mindful of these terms and you need to be careful about accepting terms that you don’t frankly understand, that there’s not a meeting of the minds.

Gini Dietrich: That’s really, it’s a really good point.

Chip Griffin: About what it means to them versus what it means to you, because they are not the same thing.

Gini Dietrich: Yeah, they’re not the same thing. And to your point, if you send an invoice on February 29th, because we’re in a leap year for March services. You’re not going to get paid in, you’re probably not going to get paid in March. So I think the deposit up front is really important. If you… another way that that work is done is this is done in crisis a lot is you ask for a lump sum up front. So let’s say you ask for $20,000 or $25,000 up front and then you chip away at that money and then the client has to refill it as you go. So that’s another way you could do it is say, okay, we require a lump sum up front and then these are our payment terms across the board.

The time to do that is when you’re signing the contract. Because when you, if you try to go back a year from now to do that with a client, they’re going to be like, but you’ve been working with us this whole time and it’s not been a problem. So the time to do it is upfront when you’re signing a new client.

And I think with agency owners in general, and we’ve talked about this before that we tend to be people pleasers. And so we’re like, yeah, okay, whatever. That’s fine. Let’s just sign the contract and get to work. The problem with that is you’re not setting the expectation as a business. And so they don’t take you as seriously as they, you know, a year from now, as they would, if you said, listen, this is the way that we work.

And you set the expectations and you communicate it clearly. We require a deposit up front. We require it with the signed contract before we, we begin any work. We invoice on the first day or the last day of every month. And we expect that payment will be made by the date. Like you set those expectations and you outline it very clearly and for the most part, clients are going to accept that.

Now you are going to have procurement and things like that are going to put a wrench in some things, but there are ways to work around it. So set the expectation, be clear about it, communicate it. And treat it like a business relationship, not like a, Oh yeah, sure. We’re, we’re happy to help you do the work.

Chip Griffin: Right. And, and you need to make sure that you’re holding up your end of the bargain there as well. Because one of the problems is that agencies are often incredibly inconsistent in their invoicing practices. And so if you want to be paid on time, you need to invoice on time. So if you want to be paid before the first of the month, you can’t send the invoice five days after the first of the month and expect they’re going to pay instantaneously, right? It does not work that way. So if you want to be paid, you need to be sending that invoice in a timely fashion so that they can meet the requirements that you have and that they’ve agreed to in the contract that they have signed with you.

And you should not treat invoices as an afterthought, right? It’s not fun. It’s not enjoyable, but you need to get them out. You know, consistently every single month at the same time, whether that means that you’re doing it yourself or you have a bookkeeper. I don’t care how you do it. It just needs to happen on a consistent basis.

Otherwise, I guarantee you that your payments will get behind.

Gini Dietrich: And it can be automated today. You don’t have to do those manually anymore. So automate it, and guess what? It’ll go out at the same time, at the same date, every single month, and you don’t have to worry about it.

Chip Griffin: Absolutely. If you’ve got, if you have a consistent monthly retainer, there is no reason not to use your software to automate it for you. And even, even if you are one of those people, like I, you know, I just need to see it every month before it goes out, you can still automate that and it will, you know, ping you and say, Hey, this is, it’s created as a draft invoice. All you have to do is click approve and it will go out. So all of the systems are designed to address whatever manner of approach that you might have.

And so it needs to happen because otherwise you will get behind.

So, so what happens when an agency comes to, or sorry, a client comes to your agency and says, look, you know, our, our procurement rules are that, you know, it’s, it’s 60 days and we have no wiggle room. That’s what we’ve got to do.

Gini Dietrich: So there’s, there have been a couple of opportunities where I’ve had the, where I’ve been able to have that conversation with a client or a brand new client. And I always explain, listen, I understand that. And here’s what we do. Here’s what we can do. So we will bill you two months in advance. So we’ll bill you for the 60 days. We’re going to do that right now. We’re going to get a contract signed.

We’re going to get all the systems set up. But we’re not going to start any work until that’s paid. So if you’re wanting to start right now and not willing to wait the 60 days, we can put it on a credit card. We can, like, there are certain things that we can do. And most, especially big corporations that have payment terms like that, they have corporate credit cards that they can put your monthly retainer on.

Unless your monthly retainer is $50 or $60,000 a month. Which most of us is not. They can put it on a corporate credit card. So have them put it on a corporate credit card and even if it’s just the first month or the first two months, they can do that because it typically falls underneath the number that has to be approved by finance before they can do that.

So have them do that. So there are lots of different ways, but the point is, is that you have to be clear about how you work and what your expectations are and what you’re not willing to bend on. And for me, I’m not willing to bend on the 30 day payment terms. I’m just not. So we always look for other ways around and clients are always, especially when they really want to get started and they’re excited about, you know, starting in the new relationship, they’re almost always willing to work with you and figure out a way to get you paid.

Chip Griffin: Yeah, I think what you’ve just described is key. I mean, it’s the success in any negotiation. If you’re willing to hold fast, if you’re willing to just say, well, then we’re not going to have a deal. If you’re, if you’re willing to accept that as the outcome, you have the leverage to get changes in most cases.

I will say there are, there are going to be exceptions to this. Sure. There are some companies that are much more hard and fast, but more importantly, some government agencies have rules that are unbendable. Effectively. And oftentimes when you’re working with government agencies, they simply have rules that they cannot pay in advance for anything. And so if that’s the case, and it’s, it’s a legal requirement that they have in whatever jurisdiction they’re in, you’re not going to get around it, so if you want to work with them, you’re going to have to concede to those.

But anytime you’re willing to walk away, if you don’t get your way, you’re much more likely to get the client to bend and give you what you need. And so, if you’re going to be playing with the big boys who have the procurement departments and the rules around these things, I think you have to be willing to walk away when the terms are not satisfactory to you.

Now, you may not settle on 30 as your, as your, you know, do or die, right? For you, maybe it’s 45 or 60. You need to figure out what’s right for you and your agency, because not everybody needs to necessarily abide by what Gini and I would do. but you need to know what your ground rules are and stick to them.

Because if you, if you allow, well, you know, we’ll let 45 this time. Well, next time it’s 60 and the next one’s 90 and they kind of keep sliding. That’s where it becomes a real issue.

Gini Dietrich: You know, I, and I also think that part of this that goes along with it too, is that clients who have 90 day terms usually or, or 60 days, they do that because the…we’re not working with big corporations.

We’re not working with the Fortune 500. We’re working with small and medium sized businesses and they’re doing that because they’re trying to save cash as long as they can. And sometimes the cash for them runs out too. So they start to get behind and you don’t even realize that they’re behind because they have 90 day terms and all of a sudden there’s six months has gone by and they haven’t paid you.

And that’s. That’s big. That’s big for a small business like yours. It’s big for a small business like theirs, or even a medium sized business, and it’s, it’s a really bad place for everyone to be in. So, with the exception of government agencies where they’re legally bound to not pay deposits or pay up front, you typically know they’re going to pay.

They’re going to pay. They have multi year contracts. They have multi year payments. Like they’re going to pay. It’s the clients that are not the GEs and the, the big, big guys, the Apples and the Microsofts of the world. It’s the small and medium sized businesses that most of us work with. That if they try to do that, it’s typically because they’re trying to make their cash run, run longer.

And you don’t want to be in a situation where they owe you six months worth of payments and you’re not going to get paid.

Chip Griffin: Right. Yeah, I mean, I think that’s incredibly important. We need to underscore that because when you’re dealing with those larger organizations or government organizations that you that you know are good for it effectively right there, they are.

They are good payers, just slow payers. That is very different from those who are basically running a Ponzi scheme to make sure to figure out how they can juggle their vendor payments in any given month in order to actually pay everybody. So, you know, certainly if it is, if it is a lesser known organization and a smaller organization, that’s when you have to be super careful about accepting these longer payment terms. Because you could be left holding a very expensive bag with well, nothing in it.

So now I will say on the flip side, when you are dealing with large organizations who are good for it, the Fortune 100s, those kinds of things, there is, if you are bad at cash management yourself, there is a silver lining to these longer payment terms, which is effectively, it becomes severance when they end the contract, right?

I mean, this is not what I would encourage. However, I have worked with agencies who had large corporate clients go away, but because they were slow payers, it gave them a lot more runway to make decisions, right? So if you are not going to, you know, to have a good, strong three month cash reserve, then having 90 day payment terms from a good payer effectively means that you built a cash reserve against that client, at least.

Again, not advising it, but it is somewhat of a silver lining when those terms do exist and and it has helped some agencies that I know were not good at maintaining their reserves. And so when a large client went away, who was a 90 day payer, they basically got three months worth of client payments as if they were still part of their client roster. So not, not the way to do it, but something to be aware of. If you’ve got a client who’s already on those terms and you’re, I mean, once you’re, once they’re on those terms, they’re not going to go back. So you can at least look at them in, in, in that way that you have a lot more protection, if you will, with them because of those terms.

That’s fair. It’s not because when you’re paid up front, the problem is, I mean, from a cash flow perspective, if they’re, if they’re always paying up front, as soon as they go away, your cash immediately evaporates. And so if you were counting on that for the next few months and didn’t have a cash reserve, now you’re in trouble.

So again, not advising this as your approach. However, if you are in this situation, be aware of it because a lot of times owners don’t think about the fact that they basically do have this severance payment from the slower paying clients.

Gini Dietrich: Yeah, I would not. I would not, recommend that either, but

Chip Griffin: The other thing I would say is whatever payment terms you agree to, make sure you enforce them, right?

If you have, because, because even more important than the payment terms are making sure that the clients actually abide by them and they pay you in a timely fashion. And so, you know, I will have conversations with agency owners who will say, well, you know, they’re like a week late on their invoice. So in another week or so I’ll reach out to them.

Nope. Nope. If they’re late, reach out to them right away. Now, ideally, you’ve got a bookkeeper or someone more junior who can do it. And ideally, get an accounting contact from that person, so that you don’t have to bother your client contact with this. Because a lot of times, frankly, it’s just bureaucracy.

A lot of times it has nothing to do with them trying not to pay or something like that. Oftentimes it’s just, you know, it didn’t get into this week’s check run, so it’s going to be next week’s or, you know, whatever. I mean, all sorts of things happen, particularly the larger the organization that you’re dealing with.

So if that’s the case, and you can have a low level contact on your side, reach a low level contact on their side, much better. But either way, just don’t let it go. The longer it goes, the harder it is to get paid.

Gini Dietrich: And, and there have been situations that you’ve let, someone has let it go, and it’s been 60 or 90 days.

And then suddenly you say to your client, Oh my gosh, we’re three months behind. We got to get this. And they’re like, what are you talking about? And they don’t know. When what’s worse is when it goes from like, say November, December and January, and now you’re in a new fiscal year. And they think they’ve closed out the year before.

That’s a whole other thing.

Chip Griffin: So that’s always make sure at the end, know your client’s fiscal year. And at the end of your client and your client’s fiscal year, by the way, may not be a calendar year. It behooves you to know what your fiscal years are for your clients, because you do want to make sure that everything gets settled before they get into the next fiscal year.

Because particularly the larger the organization, the harder is, I mean, they all have ways to deal with it. So even if they say, well, that was last fiscal year, we can’t do anything about it. That’s baloney. They still, they’re – it’s a pain for them. So they’re going to hate you in the finance department. So don’t do it if you don’t have to, but there are ways to handle these kinds of things.

But yeah, stay on top of it because the longer it goes, I mean, one of the first things I ask new clients for is a P and L, but more importantly, a balance sheet, and an accounts receivable update. So I can take a look and see, and what I’m always looking for is the 90 plus. Anything that sits in the 90 plus category, I immediately ask about, and if that’s a significant amount, then that’s a real warning sign because once invoices go more than 90 days past due, they start to become really stale and really hard to collect on, even if they’re an existing client.

And one of the other things that can happen in addition to fiscal year’s breaking over is you can have your client contact leaves. And so if you are in a situation where you’re trying to collect from a payment from last October and your client contact has left, now you’re trying to get paid for it and the new person is like, I don’t know what happened last October.

I have no idea. I can’t, you know, say whether they did the work correctly or not and whether they can get paid for it. So the longer you wait, the harder it is to get paid. So start in on it immediately. It doesn’t mean you have to call every single day and it doesn’t mean you have to be rude about it or anything like that.

But you need to be persistent and make sure that they’re aware of it and that you’re trying to address it. And then at some point, and again you have to decide what’s right for you and that particular client, at some point you’re going to have to be much more direct and say we will stop work on this date if we do not get paid.

There has to be that hard deadline otherwise there’s no incentive for them to address it.

Gini Dietrich: And I will also add that the software also where you’re invoicing from has reminders set in. So all you have to do is check a box that says please send in a reminder this has not been paid by this date. And it just does it for you!

Chip Griffin: And it will keep, it will keep doing it too in most cases, right? So you can have it go like every three, five, seven days, whatever you feel is the right rhythm. And again, you know, be reasonable about it. You don’t want to have it going every day because then people will just ignore it because it just becomes spam.

So it needs to be frequently enough that you’re staying on top of it, but not so frequently that it just becomes stupid. and therefore not useful to you. So, but, but absolutely find ways to stay on top of these things because the more timely you get paid, the better it is for you as a business. And it’s not just because you’ve got the money to pay yourself and your team.

It’s because you’re now running a healthy business in a healthy way. And you’ve got a healthy relationship with your clients as well, because it’s in your interest to be doing this.

Gini Dietrich: It is. So keep an eye on things, be clear, set expectations, communicate what your expectations are, and I promise you that 99.9 percent of the time, clients will acquiesce.

Chip Griffin: And if it’s awful payment terms, walk away, right? I mean, if you do not get the terms that you want, walk away. No piece of business is so important to you that you need to accept awful terms.

Gini Dietrich: Nope.

Chip Griffin: On that, we’re going to walk away from this episode of the Agency Leadership Podcast.

I’m Chip Griffin.

Gini Dietrich: I’m Gini Dietrich.

Chip Griffin: And it depends.