Payment Terms

Re: [spiers] Payment Terms

Hi, Carol,

I can give you our experience working as manufacturers reps in the gift and
souvenir industry in the Pacific Northwest (mostly Idaho, parts of Oregon,
Montana, Washington), if you want some comparisons and thoughts.

We represent about 50 lines of merchandise on a commission basis, 45 of
those lines are independent producers, one an importer of incense, and four
are distributors (e.g. souvenirs, books, specialty foods).

We sell to about 300 independent gift retailers, with a smattering of resort
shops, museums, C-stores, floral shops, RV parks, etc. Since we serve a very
rural area, most orders are small, and minimum orders are an important part
of the terms to consider.

Of those 50 lines:

48 accept Net 30 on first orders. However, about 15 of those 48 require a
trade credit application first. Stores with poor credit often choose to
offer prepayment or a credit card. For those lines that require a trade
credit app, Net 30 is not available until the app is on file, so prepayment
followed by Net 30 is not an option -- the credit app is still required.
Most companies who require apps do check out the references, while some just
keep it in the file in case there is a problem. Those companies which do not
require a credit application are usually smaller, and feel that the expense
and staff time associated with checking references are more costly than
occasionally getting stiffed. As the business develops, and accounts come
from further and further away, losses go up, and with increased sales
volume, it becomes more economical to start a trade credit system.

47 lines have merchant accounts to accept credit cards. Not taking Visa and
MC will lose an occasional sale. How it works: the order is put together,
and when it's ready to ship the card is processed. If the card does not go
through, a call is made to rectify the problem prior to shipping. This is a
good system, and most retailers now have this option available to pay, if
they choose to use their cards. Make sure that the paperwork with the
shipment shows the full amount of the charge, including shipping/handling.

A couple of our lines require prepayment on first orders. This loses some
sales, as Net 30 is the industry standard. Independent retailers with good
credit expect Net 30, and will provide an application.

Requiring 50% is a pain in the butt... for everyone. I recommend you not do
this. It requires two payments by the retailer, and some of them often won't
pay without an invoice for the half-down. Paperwork and bookkeeping
essentially doubles. While in some industries, it may be the norm, in our
part of the market the time we spend managing a system like this is not
worth the commissions.

CODs: These can be troublesome, but not for the reasons you might think.
Retailers who order on COD are generally poor business people. They are
paying extra for inventory when all they really need to do is send a check.
It's also a pain for the supplier who must fill out extra paperwork, pre-pay
the COD and shipping charges, and often travel to the shipping location to
get it done. COD charges generally just cover the extra expenses of the
shipping company or service, not for the extra time of paperwork and
handling by the supplier. But the worst thing you can do is give someone Net
30 when they request COD. We had some suppliers do this "to be nice and save
the retailer money", and it was always a collection problem. People who
order COD generally know they are lousy at paying the bills, usually a
personality thing. They know if they order COD, they must give a check when
the product arrives, that way they do not have to worry about it, or get
nasty phone calls later.

An occasional COD shipment does come back. Part of the business. An
impulsive person changes their mind, or a spouse gets into the decision,
after the order is sent, or someone is unexpectedly short of cash.

One recommendation is to develop some kind of standard shipping charge
system. This is a big factor in cash flow. Many retailers like to pre-pay
with a check. However, if they find out that they will get billed later for
shipping/handling charges, so they will have to write another check, they
will say "hell with it" and ask for Net 30. This happens a lot. And they
don't like to wait around for you to call the head office and get an actual
shipping quote.

Another suggestion is to consider your minimum orders as part of your
incentive strategy. Orders too low are not worth the time for the producers.
Orders minimums too large, and some retailers are unwilling to give your
line a chance, as they are afraid they will get stuck with a slow moving
inventory.

Which brings up... first order incentives. While obstacles such as
pre-payment on the first order are not uncommon, most successful companies
have an incentive program to get the retailer to try the line. Remember the
fight is really for shelf space. For most producers, the real success is in
re-orders, and if you cannot even get the retailer to try the product, you
are not even in the game, much less have the chance for repeat business.
Common "first order" incentives include lower minimums, free shipping,
extended terms, 10% free items, etc. If you are doing one-shot products,
this is less important, and maybe even counter productive. Similar terms are
suggested to get pre-paid orders, or to take orders at wholesale trade
shows.

In terms of collections, the biggest red flags come with:
A) Expansion... owner thinks one store, is successful, two stores will be
better.
B) Partners splitting the sheets. One opens a new store, and must fill the
entire store (and will try to do so on Net 30... guaranteed disaster).
C) New stores or new owners. Entrepreneurs are compulsive optimists and take
advantage of Net 30 terms. Bad news.
D) Liars. Self-explanatory.
E) People on hard times. Most of these people are honest, and eventually
pay. Patience is of value for these folks, in most cases. But if they do not
follow through after making promises, take aggressive action ASAP. They are
from category D).

Returned merchandise is most likely when both a husband and wife are
decision makers in the business.

Make sure return policies are clearly stated on the shipping paperwork
and/or invoices. Also, on any paperwork the store signs to place the order.

Best wishes!

Malcolm & Sandy Dell
Lewis Clark Gifts & Souvenirs
Orofino, Idaho

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