(Caveat – The basic principles here work for both suppliers and distributors in our industry. Some of the comments below may be more specific to one or the other, so please read at your own risk.)
Who would not like to be prepaid for products or services rendered? I have assumed what I am hearing is a cascade of crickets.
Prepayments are wonderful, in whole or in part, for a variety of reasons. (Not by credit cards, however) To start with, they reduce your cash flow challenges. They reduce your credit exposure with the client. And there is less, if anything at all, to collect later on. Possession is truly ten tenths of the law.
When should you request it?
First of all, let’s start with when you should NOT request it. If your only logic is that this is a new customer, fuhgetaboutit. Do your due diligence. Just because your client pays you upfront for the first order, it does not guarantee promptness in future orders. You had leverage, and you used it this first time.
If your job is too large to fund, that is a good time to consider a prepayment of some sort. (Yes, I hear the chorus now from some of our larger industry players – come join us and we provide your needed working capital. Also valid, but for different reasons.) If you need to send funds to your supplier, this is one way to make it happen.
Another reason why you should NOT request it. If you are asking for a deposit to cover other working capital deficiencies, then you are “robbing Peter to pay Paul.” If you are not sufficiently capitalized to run your business, you should absolutely look into some of our larger industry players. We have many companies in our industry who do not have sufficient capital to run their business. Eventually this will catch up to you, so do not allow prepayments to cloud your financial vision. Put it aside for the specific job, not your general working capital. The temptation and ease are great to “borrow” these funds for other needs, however ultimately it will bite you back if you are not careful.
For smaller orders, a prepayment certainly makes life easier for all. It eliminates the need to chase a customer later on. Just imagine how much staff and management time is required to dun deadbeats. Not the highest and best use of our time.
Sometimes a project has a very long production schedule. You may be required to prepay your supplier. Or maybe you need to have your customer with “skin in the game.” A financial commitment on their part certainly captures their attention and urgency.
Unique custom products may also justify a prepayment. Everyone has some financial exposure during production, so should the client.
If you qualify as a minority owned business, you might have some leverage in requesting a prepayment. Part of the vendor selection process included this criterion; take advantage of it.
You might be concerned about the creditworthiness of your customer. This is an excellent time to ask for the prepayment. Sometimes it is best to walk away from an order rather than lose the proceeds to bad debts.
How do you ask for the prepayment?
Be forceful for sure. If there is any hesitation in your voice, your customer will sense the weakness. They would rather not prepay, however do not give them the opportunity to avoid it.
Be prepared to respond to your customer’s questions or challenges. You might need some valid reasons, other than “this is our standard policy.”
A note on credit cards for prepayments. It is all too easy for a customer to “void” or otherwise chargeback a credit card charge. Unlike a check, which is deposited into your account, the customer can apply to their merchant bank under certain circumstances for a refund. That will be charged back to you.
A 1975 graduate of the Wharton School at the University of Pennsylvania, Harvey enjoyed a 20+ year career in commercial banking, exercising his “golden parachute” in 1996. In his volunteer life, he is a past chair of the Small Business Banking Unit of the American Bankers Association, Easter Seal Society of New Jersey, the SAAGNY Foundation, PPAF EXPO, and Supplier Committee of PPAI. He is also a past President of PPAF. PPAI awarded him the H. Ted Olson Humanitarian Award in 2013.