Ways to Improve Your Vendor Agreement, Even With Big Retailers (Views: 3404)
Thu, 04 Feb 2016
FundThrough gives businesses that sell to large customers the power to get their invoices paid in 24 hours instead of waiting 30+ days. Read on to get some valuable tips on how suppliers can sweeten their vendor agreements in order to make financing these receivables easier.
Fundica recently sat down with Steven Uster, founder of FundThrough.
Fundica: Can you give us an example of a situation companies may find themselves in when taking on big box customers?
FundThrough: Recently, we had a client who was excited to share his great news with us—he had just received his first purchase order from Walmart. For an entrepreneur, getting a PO from Walmart is like winning the entrepreneurship Super Bowl. That single document was all the vindication he needed, proving that his hard work and long hours had finally paid off; the world would finally see—and ultimately fall in love with—his brand.
Our client was over the moon. There was only one small problem: In all his excitement about this huge achievement, he had signed an agreement that contained some very unfavorable terms for his company, and significantly limited his ability to finance his Walmart invoices and purchase orders.
It would be naïve to think that our client—an entrepreneur who did not yet have any traction with his product and had never sold anything to any retailer before—could force Walmart to bow to his every demand. However, by understanding some of the key levers that could be adjusted in the agreement prior to entering into negotiations, perhaps he could have changed some details, which may not have been important to Walmart but would have made it easier to finance his invoices.
Fundica: What kinds of terms do large companies like Walmart use that can compromise a supplier’s ability to finance receivables?
FundThrough: If the agreement says anything other than “true sale,” the risk of sell-through is borne by you, the supplier. “Guaranteed sale” means that unless the product sells within an acceptable period of time, Walmart can send it back to you or demand significant discounts or credits, as they are taking the product on consignment, and you are guaranteeing that it will sell. A “true sale” means that Walmart is purchasing the product from you and is obligated to pay you whether they sell it or not. In a true sale, the risks are transferred to Walmart as soon as they accept delivery. Typically, factoring companies will only fund invoices that are true sale (although at FundThrough we can also fund guaranteed sales).
Fundica: What are some important considerations to keep in mind when agreeing to a term length?
FundThrough: While in Canada the average term provided to customers is approximately 60 days, invoices that are outstanding for 90 days or more are difficult for factoring companies to fund, and banks won’t include those invoices in their margin calculation. It’s also important to understand when the payment term begins. Walmart, for instance, has an EOM (End of Month) policy in their vendor agreement. EOM, means that if you deliver past a certain date (usually the 24th of the month), Walmart will acknowledge the invoice as being received in the next month. Therefore, a 30 day payment agreement on EOM terms, could mean that you really have 36–37 day terms.
Fundica: Are early payment discounts a good solution to increase cash flow?
FundThrough: Cash flow is critical for small business owners and many companies opt to include early payment discounts in their vendor agreement. Walmart’s standard early payment terms are 2%/35/65. This means that Walmart will have the option to take a two percent discount and pay you in 35 days, or if it opts not to exercise the early payment option, the company will pay in 65 days. The two percent is deducted from the gross invoice amount before all other deductions (a typical Walmart invoice might have 10% worth of other discounts). This means the cost for you to get paid 30 days earlier by Walmart is 2.2%, or 26.7% per year! You can go to a third party funding source and pay a lot less—the cost of funding a Walmart invoice through FundThrough is typically 0.033% per day, or 12.0% per year.
Fundica: Are there any hidden costs suppliers should look out for in their vendor agreements?
FundThrough: Walmart typically has a table in their vendor agreement that details all deductions and discounts. Some of these are on-invoice (deducted directly from the gross invoice amount) and some are off-invoice (a monthly or quarterly charge). These deductions, which can add up to 10% of the gross invoice amount, include promotional allowances (slotting fees), warranty fees, co-op/marketing fees and defect fees. The factoring company will deduct all these discounts from the total invoice to determine available funds.
Fundica: How do different shipping agreements affect a business?
FundThrough: The shipping terms determine when you are able to invoice your customer and start the clock on the agreed terms. Shipping terms also determine when your liability ends and the goods become the property and responsibility of your customer.
Make sure you read the delivery terms carefully in the vendor contract. There are often penalties for missing delivery windows, taking longer than anticipated to unload, or not delivering the goods in the precise manner expected.
Fundica: What are the best remittance arrangements for a business to make?
FundThrough: Upon setting up an account with a customer and receiving a vendor number, you will be asked to provide details about remittance (where payment should be made) and method of payment (cheque or direct deposit/EFT). If you are planning on factoring your invoices or using a third-party asset-based lender, you will likely need to change your remittance details to a bank account controlled by the factor or asset-based lender. This change can take time to work its way through the customer’s organization, and may be easiest if done up front when you first sign an agreement with the company.
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