Are you new to negotiating payment terms
with suppliers and customers or in your small business
to date, have you been struggling
with either of these?
Well, in this video, we're going to outline some techniques
and things to consider when negotiating both with suppliers
and customers and how to ensure that you protect your working
capital.
And at the end of the video, I'll
be outlining some key resources for you to research
further, which I really hope will help you
in your negotiations in the future.
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Hi, guys.
If we're meeting for the first time,
my name's Alan Brannigan, from Founder Cave.
I've been an entrepreneur for over 15 years.
In that time, I've been involved with businesses that have been
B2C, SaS, product delivery.
I've overseen manufacturing in China.
I've overseen shipping in China.
I've worked in B2B enterprise-type businesses.
So I really understand how critical payment terms are,
both from a supply side and the customer side,
and how unfavorable payment terms can really
impact on your cash flow.
For those of you that are new to this
and don't understand what working capital is,
working capital is literally the value of your current assets
minus your current liabilities and, like I say,
can have a really big impact on your cash flow.
So money in versus money coming out and when that happens
is really, really key.
So let's look at a software SaS B2C, B2B model.
Typically, you're obviously going
to be hosting some sort of software,
and you're probably going to be charging a license fee.
So on the customer side, you'll be
charging a license fee, maybe an implementation fee as well.
So there might be work required to set up your system
and their system, in which case, you're
going to cover your costs upfront there.
And then once they're actually using
the product and the system's live,
they're either going to be paying you monthly
or maybe they're paying an annual fee,
maybe it's two years, whatever it is.
Typically, your costs are going to be,
obviously, man hours for the cost of integration.
But you're going to have hosting and setup costs.
So you're going to be hosting your system somewhere.
You're going to have databases and backups and all that sort
of thing.
So more often than not, in terms of your operational costs,
you're probably going to be paying
either an annual or monthly fee.
So what you want to do there is just make sure that at least
at the very least, whatever you're paying your supplier
or providers, you're matching those payment terms
with your customers.
Key thing is always to make sure that you're receiving money in
before you're having to pay the money out
because obviously, you're only making a gross profit on that
and that's probably what's covering
the rest of your internal overhead along with any capital
that you've raised, et cetera.
So again, B2C, you've probably done all the work upfront,
and now, you're just--
you've done all your marketing and now you're
just looking to clip the ticket, and you're
matching it against your internal costs or your supplier
costs.
Now, if you're just starting out,
a very good way of grabbing revenue in quick
is perhaps charging-- incentivizing
them to pay an annual fee or a six-month fee
or a biannual fee.
Maybe they get a 20% discount, a 30% discount, whatever it is,
but you're pulling in that revenue upfront
and maybe you're only paying monthly at the back end.
So that's the software side.
Now, when it comes to hardware and products,
it's a very, very different ballgame.
And working capital can have a real impact on your business.
You have to have the product, more often than not,
before you sell it.
So you'll have committed some sort of development
and probably pilot production or early-stage manufacture
with your suppliers.
So there's no getting around it.
You're going have to raise some serious capital
to do that first.
But what you want to do in any start-up or small business
is, obviously, get to sustainability
as quickly as you can.
So you do need to keep your payment terms
and your ongoing revenues in mind.
And look, there's many ways that this could be arranged.
So it really depends on whether you're
dealing with a large retailer.
Maybe you're selling through a channel.
Maybe you have a distributor.
Maybe you're doing some sort of FBA Amazon-type arrangement,
or you're doing drop shipping.
They're all very different, but you're probably
going to have to commit to paying
your supplier or at least a large part of it
before you get paid.
So you're going to have to factor that in.
Now a good way to B2C, of course,
is if you get a credit card payment.
Well, you get that upfront before you even
have to ship it.
And you can charge them for shipping.
So you're not doing without that revenue
whilst product is on a boat or on a plane or something
like that, but you are going to have
to commit to have that shipped out of a factory
or out of your suppliers' end.
So like I say, B2C, you're going to get
some money coming in upfront.
You're going to ask for an upfront payment,
and you're going to have that on credit card.
So that's secured in a way.
That might be held by Visa or MasterCard
in escrow until something is delivered.
Now, where it gets really interesting
is if you're in the B2B product space.
My experience dealing with large retailers,
their stock standard reply is going to be,
we want net 90 days, which means you're
going to deliver them the product,
and they're not going to pay you until 90 working days
after that or maybe 90 calendar days,
depending on how they work it in.
Now, if you're just starting out,
it's very rare that you're going to be able to negotiate
that with your supplier.
So let's run through a scenario here where
you're manufacturing widget A, and you're manufacturing it
in China.
You're going to have it shipped to a port in Hong Kong,
and then you're going to deliver it to, say, the US, right?
And your customer is saying, well,
I want to have net 90 days.
Well, that's going to be very, very difficult for you
to sustain, unless your balance sheet's really
strong because your supplier, there's
no way they're going to get you net 90 days unless you've
got a very long trading history and they
can get insurance to cover any risk of you not paying them.
So again, coming back to a small business or a start-up,
more likely, what's going to happen
is you're going to have to pay 30% deposit and then
30% on delivery.
You've already paid.
You've paid upfront for this product.
And now it's going to have to be shipped.
So if you're air shipping, maybe that's
2 to 10 days before it gets delivered.
If you're sea freighting, that could be up to four weeks,
depending on when the boat is available
and where you're shipping it to.
So you've also got to factor in that time frame.
Then, if your customer's wanting payment terms on top of that,
you could be looking at four or five months before you actually
get paid for money that you sunk back to your suppliers.
Now, look, there are many ways around this
and probably, rule number one, I guess, in this scenario anyway,
is try to get away from the procurement team in the company
that you're dealing with in terms of your customer.
Their KPIs are set to racking in the best deal they
can for their company.
So they're going to be quite rigid on the payment terms.
You might have some flexibility there.
But they're not going to understand you
in terms of a partnership and a relationship.
They're not going to understand the plight of your company.
They only care about their own KPIs and hitting their numbers.
So good rule of thumb is to work with the strategic or product
development or business development people, who
are incentivized in other ways.
So they're incentivized to bring new products
into their channel, for example, or strategically,
this is a direction we want to go.
So they might be a little bit more
forgiving in terms of how the payment terms are structured,
and they can fight that battle with procurement
and accounting, et cetera, inside their own organization
because they're incentivized to get this new product.
And they've got buy-in from the executives
because, yes, for whatever reason,
strategically or in terms of revenue growth,
they've decided this is a type of product
or a type of technology that we need
to bring to market, in which case
you can probably have some freedom to negotiate there.
Here's something to understand, especially
if you're a technology start-up, you're a risk, right?
For a large company, customer, or supplier,
you're a big risk to them.
It's very hard for them to get any insurance cover.
They're taking a risk internally in terms of their reputation
and maybe even their careers.
And they have to back and vet your company.
So they're have already done a lot of due diligence,
I would imagine, by the time you're getting to a point
where you're negotiating payment terms.
If they're used to negotiating a net 30 days
or a net 60 days, whatever it is, you might say, look,
I can't do that because I've got to pay 70% on delivery.
You're asking for sea freighting.
Well, that's another four weeks.
So I just don't have the working capital to do that.
So here's a few things you could do.
Number one is try to get them to match the payment
terms with the supplier.
There's at least a 50%-50% chance that that will happen.
Another one is, OK, well, I need some sort
of letter intent or minimum order quantity
or some sort of guarantee in forecast from you or forward
orders, whatever it is, to justify me taking the risk
or for me to go back to, say, my investors,
where I can get more capital to fund that.
Or and here's another key one, where you could
go is go to the bank, right?
So most banks will provide what's called trade funding.
So that's-- it can work, but you'll probably need a bit
of traction.
If you're really just starting out,
like this is your first big deal,
you're going to have to rely on the customer
and their willingness to bring the product
to market to work with you.
I'd be very surprised if you got much leeway from your supplier,
if I'm honest because they've got to look
at it from their perspective.
Again, you're a risk, especially if you're a new business.
So let's go back to the whole China supply scenario.
If you're asking them for payment terms, even fast
forward a year, right?
If you've been trading with them for a year,
and you've paid your bill, and they
know that you've got this large customer in the United
States or the UK or wherever it is, even then,
it's very hard for them to get sign-off
within their own business, unless it's a small factory
and you happen to have a great relationship.
But big risk from them, and there's
no way their banks are going to give them any sort of cover.
So they'll be looking for--
they're going to offer you, say, net 30 days.
Well, then, the first thing they're going to do
is going to check with their bank or their insurer
to make sure they can get cover for that so if you default
on your payment, they can recoup that somehow.
And as we all know, banks and insurance companies
don't do you any favors.
So hard, I mean, really hard for you
to get favorable terms on the back end.
I mean, some suppliers, you've been dealing
with them for three years, unless you're
hitting some serious volume, and they're making a lot of money
off you, it's tough to do that, to be fair.
So I think working within the impetus and the desire
of whoever it is your champion within your customer's company
is probably the best way to get to matched terms.
But the key thing is, bringing it right back
to working capital and cash flow is king,
you've got to think about all these things
before you sign any supply agreement,
either on the supply end or the customer end
because you don't want to be in a position
where you've put money out and you're waiting months
because you've got long payment terms that you're waiting
for that money to come in.
So if you're down $100,000 because you've
got net 90 days over here, but you've paid your supplier,
you've still got your office rent
to pay, your utilities, your staff, everything else.
So that money's coming out.
So you've got to factor it into your cash flow planning.
OK.
So I mentioned some resources to help you get started.
Now, the first place I would start
would be your local business associations.
You're going to have some sort of government-backed trade
association that can advise you on these things.
There's probably grants and mentors and advisors
there that you can get all this assistance for free.
So I've posted some of the links in the comments
below for some of the main centers,
such as the US, Canada, and the UK, for example.
There's other places, such as calling up your local customs
agent.
They'll be able to help you with what sort of documentation
you require.
What are the local duties and taxes and that kind
of thing for importing and exporting into a country?
Going to couriers and freight forwarders,
so someone like Kerry Logistics, Mondiale Shipping or something
like that.
Look at the main shipping companies in your area and/or
freight forwarders, and you'll be
able to get some free quotes.
And they'll probably be able to point you
to someone local or an organization local that
can provide you with a lot of this information as well.
Freightquote.com is another good one,
just in terms of understanding costs and lead time.
Also, too, just get your own accountant's advice, your CFO,
if you've got one, your lawyer, if you've got one,
to go through the contracts.
Again, it goes without saying.
Don't sign any supply agreement without getting your lawyer
to review it first.
Just make sure you don't go into these things half-cocked
and think that it's all going to be OK because these are
the things that can really, really come back
to bite you in the long term and really hurt.
So just be careful out there, guys.
I hope this video was useful.
If you like this video, please hit the Subscribe button,
the Like button, the Share button, whatever it is you do.
And we'll see you next time.
Cheers, guys.
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