Making Goliath Pay
Every entrepreneur dreams of making the sale to a big company. But although big companies have deep pockets, they're also waist-deep in red tape. How do you play ball with the big boys and actually get paid?
Ron Simkins has one word of advice: plastic. The CEO of LexJet (see " Flirting with Disaster") says asking customers to use credit cards for their purchases has made all the difference to his company, a direct marketer of printing materials in Sarasota, Fla. He says 90% of his customers -- including Whirlpool and Kinko's -- have opted to pay with plastic for fees ranging from $100 to $100,000 annually.
Simkins for one is convinced that big companies are moving "in droves" to plastic to reduce the administrative expense of dealing with small vendors. "Corporate credit cards are not a new thing; what's new is the use of cards to mitigate the cost of purchase orders." Even Uncle Sam is getting in on the act, allowing some government workers to charge official purchases on government-issued credit cards.
What the trend means to LexJet is simple: the company gets its money literally overnight. What's more, there are no invoices to track down and no more frantic calls to make to customers' accounts-payable departments.
What's in it for the customer? With no purchase orders to process, the cost of bringing on a new vendor is greatly reduced. But as is the case with invoices, the customer still has 30 days to pay. Finally, if the company isn't satisfied with the purchase, it's a simple matter for the vendor to call the credit-card company and ask that the charge be removed. At least that's the argument that Simkins makes to all his customers. "We teach them how to do it and why to do it," he says.
The CEO has become a Tom Paine of sorts -- going so far as to publish a short pamphlet on the topic at his Web site, www.lexjet.com. Simkins insists he's no shill for the credit-card companies, though. He says there's nothing in it for him personally other than better cash flow for his $10-million company. Of course, there's a cost for that convenience. The credit-card company charges a fee of 2% to 3% of the purchase, a small price to pay, argues Simkins. "Our cash flow is worth more than that on the float." Still, to some company owners, such fees smack of factoring, but Simkins says he'd rather get 97% of his money now than wait 30, 60, or 90 days to get it all.
Another advantage to taking plastic: it weeds out the deadbeats. In general, Simkins says, "the only people who resist this are those who can't get credit." Think of all the money you could save on D&B reports.
Consider too the advice of Bob Carroll, CEO of TelStrat International (#232). Carroll says if you want to get paid faster, be aggressive in sales negotiations. When he landed Nortel Networks as a customer, he was overjoyed, despite the international company's payment terms: net 45 days. In his experience dealing with large customers, net 45 days actually meant "more like net 60 or net 70," Carroll says. "Cash being a problem, we started asking what they could do for us."
Luckily for Carroll, size mattered. It turns out that Nortel Networks had a special "small-business" program for companies just like TelStrat, which manufactures telecommunications equipment. With less than $3 million in sales at the time, Carroll's company qualified for net-15 terms. The CEO learned of the preferential terms during contract negotiations with a Nortel Networks purchasing agent. "It was easier to give price concessions knowing we would improve our cash flow," Carroll says.
The special treatment continued until TelStrat's sales reached $10 million. "Then we were told we weren't a small company anymore," says Carroll. The company's terms with Nortel Networks are now net 30, but Carroll continually devises new ways to ensure that he actually gets paid within a month. For example, he recently redesigned his invoice to include more information, such as the phone number of the person at Nortel Networks who made the purchase. "We might be dealing with a Nortel Networks purchasing agent in Ireland and a Nortel Networks accounts-payable clerk in Nashville," he explains. "And the person in Nashville doesn't know the person in Ireland."
It's all about greasing the skids so that invoices are quickly approved for payment. "We've never had to write off a single invoice," says Carroll. "That's the advantage of dealing with a big company -- they will pay you."
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