Payment Holiday?

Discussion in 'Growing and Managing a Business' started by Mary H, Jun 6, 2011.

  1. Mary H

    Mary H
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    Help! Our 2 biggest customers have declared that they are taking a "Payment Holiday" during the months of June and December. Any invoices that fall due (net 60) will automatically be paid at the 1st of the months following. Can they do that? Isn't a Purchase Order a contract in which we agree to produce something at an agreed upon price and in exchange the purchaser agrees to pay within a designated time frame?
     
  2. Fergal

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    Welcome to our Business Forum Mary H. What country is your business based in?

    It seems a bit coincidental that two of your customers would come to you looking for a payment holiday at the same time. Is there a reason behind it, e.g. do you think that maybe they were they talking to each other and both decided that they would contact you?

    In some countries it would be illegal for them to demand a payment holiday. However, if you were to pursue any form of legal action against them you would most probably lose their business. If they are big customers and they are important to your business there may not be much that you can do in reality to stop them from doing this.

    Personally I would contact them and arrange separate meetings with each of them. At the meeting I would tease it out further to try to determine exactly why they were seeking the payment holiday. You could then explain the difficulty that this is causing to your cash flow and try to work out some form of compromise.
     
  3. Mary H

    Mary H
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    Reply to Fergal

    Thanks for your reply. We are an American business. A very small Machine Shop, less than 10 employees. These 2 customers are quite large and I doubt they would bother to conspire against us. I actually wondered if this was a new business tool to hang on to cash during times of audits or seasonal expenses, and is this common practice. We have made contact with one customer who offerred to pay some of the invoices early. But this has really affected cash flow. I have had to string out my vendors. Not conducive to that small business engine we are hearing about.
     
  4. ArcSine

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    Mary, I agree with Fergal that it seems quite the coincidence. If these two companies are not affiliated in some way (common ownership, e.g.) then either their owners just got back from the same trade seminar in which some cash management guru was yakking about this pay-holiday strategy, or they both subscribe to the same trade magazine and read the same article.

    A payment holiday is something that can be offered by the creditor party, but not just unilaterally decided upon by the debtor party. One question: To what extent do the payment terms, as articulated in your invoices, rise to the level of a binding agreement? (I'm not an attorney so I can't really say. It might depend on circumstances. Putting a line at the bottom of an invoice that reads "payable within 15 days" is one thing.....having a signed contract before starting a project, in which it's agreed by both parties that payment is due no later than X days following completion, is another.)

    It sounds like these guys are relying on the thinking that you won't find it economically reasonable to sic a lawyer on 'em, just to avoid a short delay in payment. When a customer knows he represents a major %age of your total revenues, he gets pretty confident in his ability to call the shots with minimal resistance.

    You mention that a customer has offered to pay early. Maybe you could entice a few more to do likewise, in exchange for small discounts. True, the discounts ultimately are coming out of your pocket, but perhaps it's worth it if the strategy helps you bridge over a critical cash shortage. Offering discounts for early payment is analogous to taking a very short-term loan, albeit at a relatively high interest rate. If it keeps you from incurring a severe cash crisis, the interest cost might be justified.
     
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  5. Grumpy

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    In my experience (which isn't a lot, lol), then I wouldn't allow this for any purchaser unless they were a reliable and trustworthy retailer. I'd be quite interested also in the reasons why they were asking for this and I'd setup meetings or phone calls with both customers to try and find out more about their reasons for asking for the payment holiday.
     
  6. sigma

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    Freaky speaking, this happen to me quite often. Some of my client are using this kind of method to delay the payment. If this happen, i will always try to call them up, and talk about the payment. Due to the "holiday", i might ask for the early payment, if they reject to pay early and their payment term is always on-time based on previous record, i can still accept the delay of the payment.

    On the other hand, i will also consider my own finance, if this make me trouble, i probably will ask for partial payment before the holiday. The customer can understand the situation since both of us are running business and always wish to be in win-win situation. Communication is the best way to solve this kind of problem
     
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  7. Mary H

    Mary H
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    Thanks for all your input. These 2 companies calling for a Payment Holiday are in the same industry. Also, neither informed me of said Payment Holiday until the invoices were approaching 90 days out. It is very difficult to actually get a real person to talk to in their A/P department. We also have been put in a precarious position by engineers that try to circumvent their Procurement Policy to get what they need quickly. I don't want to jeopardize their business so I think early communication and timing our invoicing around these payment holidays will be the solution.
     
  8. JPM

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    This is fairly important information for your clients to remember, they are a business in the same way that you are. Open, honest and frank communication showing you understand that this may help their cash flow but is not helping yours is important also. If they are to remain a trusted client, then they will come to some sort of compromise(from experience).
     
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  9. Fergal

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    Mary H, like you say a lot of issues in business can be resolved through good and timely communication. I remember once dealing with a major client (I won't say their name but they are a company you will have heard of) who wanted to know the profit margin we were getting on their business.

    This was a most unusual request but we agreed to it due to the status of the client and the long term relationship we had with them. Afterwards they informed us that the reason they like to know their suppliers' profit margins is because they want to ensure that their suppliers are making enough money to stay in business. If you communicate the issues to your client they may surprise you with how understanding they can be, after all it's not in their interest to harm your business.

    You say that it's difficult to speak to a real person in their accounts department, perhaps you could ask the people you deal with in other departments for a name of the best person to speak to.
     
  10. td2011

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    Yes, I agree with the point fergal made, what would they achieve in harming your business. I know very well what a nightmare it can be to actually speak with a person without being ping ponged around an office for a few days until you get anywhere. Just be frank about the situation and I'm sure you will sort the problem out soon.
     

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