Me Want Cash Up Front

Getting customers to prepay.

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For a small company, getting paid on time can mean the difference between having cash for an expansion and borrowing to pay the bills. But if you're a minor vendor, you may be last on your customers' payment priority list. One solution: getting clients to pay in advance. That's easier said than done, of course, because your customers like holding on to their cash as much as you like seeing them part with it. Nevertheless, clients will prepay if given the right incentives. Following are three stories of business owners who got sick of waiting around for payment and decided to do something about it.

1. The coaxer

The company: Geoff & Drew's Incredible Cookies, Boston

The problem: In 2004, Geoffrey Auslen and Drew Koven, founders of cookie company Geoff & Drew's, wanted to take on bigger orders. Their company, founded in 2001, sells cookies, brownies, and other baked treats in decorative boxes and gift baskets, mainly to corporate customers. The average order had hovered around $2,000, but it was creeping up to $5,000 and some customers were asking for as much as $40,000 worth of goodies. Geoff & Drew's had no outside investors, and only 10 percent of customers paid in advance. If a big customer failed to pay, the company would lose a major chunk of working capital.

The solution: Koven, the CEO, started talking to corporate buyers at trade shows to learn what would induce them to pay in advance. Buyers have different trigger points, he learned--some want discounts, but many respond to other incentives. So the company started offering priority shipping, specially designed gift boxes, custom cards, and custom ribbon to those willing to prepay. And yes, the company gives discounts, too. When customers were wary of paying an unknown vendor in advance, Geoff & Drew's offered references. Or, Koven would hop on the phone to talk personally with buyers. "It's really hard to ask people to prepay when they don't know who you are," says Koven.

The result: By the end of the year, Koven says, about a third of his customers were paying in advance. Now, more than half prepay. The perks dent profit margins, but having cash on hand has allowed the company to fill orders as large as $100,000.

The bottom line: Find out what they want, and they'll give you what you want.

2. The problem solver

The company: Onestop, Canoga Park, California

The problem: Big corporations often take their time paying their bills. But that's nothing compared with the government. Marx Acosta-Rubio, founder and CEO of Onestop, a $12 million office products supplier, has waited five months to get a check. Two years ago, he was serving a county government client that placed orders of more than $500,000 a quarter. Before Onestop could get paid, the client had to get five signatures on a purchase order. Onestop had to borrow money to buy the inventory, then pay interest while waiting for payment. The customer also placed emergency orders throughout the year that needed two signatures apiece. Between February and June, however, while the client's budget for the next year was being established, such orders never got through, so the client kept running out of toner, Onestop's flagship product.

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