I had a few conversations recently with makers where they said some version of:
“I offer all of my stockists Net 30 Terms -- they place their order, I make and ship it, and they pay me within a week or two of receiving it, once they’re happy with the order.”
Honestly, when I hear that, I worry. It’s this feeling of: “I completely understand why you’d do that, and it’s industry standard for product companies selling nationwide, and you should definitely do what you think is right for you and also... I feel worried for your business.”
Every maker is different, and it’s crucial that you make your own decisions about what terms you offer to your stockists. But there are some tricky consequences of offering payment terms to stores -- and I want you to be fully informed when you make this kind of decision. So in today’s article, I’m giving you a full rundown of what payment terms really are, how they affect your business, when you should and shouldn’t give your stockists Net 30, and super-specific answers to common questions about payment terms.
“Net 30” is a business term and a form of credit relating to the payment terms for orders. Net 30 means that the store owner must pay in full for the order within 30 days of the order being shipped. Net 60 and Net 90 means they must pay in 60 and 90 days, respectively.
TWO THINGS THAT ARE TRUE:
True: It is industry standard for product companies to have Net 30 (or longer!) terms for the stores they sell to. Anthropologie is definitely not paying you before you ship their order.
Also true: as a maker selling your line to independent brick-and-mortar shops, you probably shouldn’t offer Net 30 or other payment terms because: You will always be spending cash before you really earned it. And the problem will get worse as you grow.
YOU’RE LENDING MONEY TO STORES. YOU JUST DIDN’T REALIZE IT YET.
Let me walk you through this. When you prepare an order for a wholesale customer, you have the following expenses:
Labor (perhaps it’s just your own labor currently, but eventually, you’ll want to pay people to assist you.)
Shipping and insurance
On a $750 order, the above items could total several hundred dollars -- but it doesn’t feel like several hundred dollars because each of the items was purchased separately, and nothing totaled that much when you paid for it.
But the fundamental reality is that you spent money for that order BEFORE you received money for that order. You’re effectively lending money to the store owners for 30 or 60 days -- the time between when you prepared their order and when they paid for it. That’s not a problem on any single order, especially if you’re positive that the store will pay their bill. But you’re creating a fundamental cashflow problem in your business -- you’re lending money to stores that you probably don’t have.
At first, that gap -- the time between the money you spent to create the order and the money you earned for the order -- isn’t that big of a deal. Each new order sounds great -- but if you have Net 30 terms, each new order makes your cashflow problem worse. And as you grow, this gap can become very challenging to manage. Yes, you’re still making a profit on each order -- but the cash OUT is happening before the cash IN -- so you’ll always be short on cash, despite the profit you’re making overall.
CASH IS THE BREATH OF YOUR BUSINESS.
It is said that more businesses fail from lack of cashflow than from lack of profit. And not to get too hippie-dippie on you, but I look at cash as the breath -- the inhale and exhale -- of the business. Of course, breath is not the whole purpose of life… and simply breathing doesn’t mean you’re healthy. But if your breath stops for even a short period of time, you can’t continue.
It is the same with cash: cash allows you to purchase the things you need and keep your business running. Cash allows you to pay yourself, covering your personal bills. Cash means you can make choices and make investments in your business. Cash is not the purpose of your business. But without cash, you can’t continue.
LOGISTICS, RELATIONSHIPS, AND MONEY ALL DO BETTER WHEN THEY’RE SIMPLE.
In addition to the fundamental cashflow reality, there are additional reasons to not offer retailers payment terms, as a maker:
It’s harder logistically.
If a store owner pays after the order is placed, you’ll need to wrangle the payment later. That may mean calculating and sending multiple invoices… as well as keeping track of who has paid and who hasn’t paid. That’s why big companies have whole departments that handle “accounts receivable” -- it’s a big job to manage.
It’s harder relationally.
Offering payment terms to stores sounds like such a positive thing. But there are a couple of dangers to your relationships with valued store owners. First, when the store owner needs to pay money as part of the order placement process, you know for sure that the order was well-considered and serious. If not, there can be shades of grey that can be tricky to figure out. You don’t want to be writing emails saying, “So, I just wanted to confirm that you’d definitely like me to put together this order?” And you definitely don’t want to be sending stern payment collections emails months after you shipped the product.
It’s risky financially.
Here’s the reality: owning and independent brick-and-mortar store is a pretty amazing feat. Store owners are hardworking, creative visionaries. Also: they face challenging financial realities every day and every month. Every store owner I know is a person of integrity and deeply honors their financial commitments. Also, store owners as a group are likely to run into financial challenges that could put their ability to pay you at risk. The blunt way of saying it is: store owners may not be the best people to loan money to over and over again, as a core part of your business practice, and with your business and personal financials depending on their ability to repay those loans.
QUESTIONS YOU MIGHT HAVE ABOUT PAYMENT TERMS, AND MY BEST SHOT AT ANSWERING THEM.
Q. So, you’re saying that payment terms usually aren’t good for makers. Are there any exceptions?
A. Yes. You can and probably should provide payment terms for your retailers if one or more of the following are true:
You have a big cash buffer for your business that is so “extra” that you don’t need to touch it for anything else OR you have access to a cheap, reliable source of credit.
You are primarily selling to Nordstrom, Target, and other nationwide retailers.
You have a longstanding relationship with a given store owner, they pay promptly, and reorder often.
Q. Are you saying that I need to collect 100% of every sale as soon as the order is placed?
A. No. We’ve worked with about 600 makers and most of those require either 100% payment when the order is placed or 50% when the order is placed and 50% when the order is shipped (or even when it is received.) The exact parameters depend on your individual business. What do the stores you sell to expect? How long is your turnaround time? How much of a cash buffer do you have? How much do your materials cost? Do you have employees or assistants you need to pay? All of these factors can affect the exact parameters of your payment terms.
Q. Aren’t you all about helping store owners and being thoughtful about their perspective? This is my way of offering a perk to them!
A. Offering perks to store owners is so crucial. If you can offer free shipping, or fun freebies with each order, or volume discounts, or more-than-2x markup… these are all great things to offer. Payment terms are also great things to offer, especially to store owners you have an established relationship with. But you should never offer perks to store owners that harm the key financial realities of your business. I’m all about trying to do things that benefit store owners. Offer whatever you can -- but for most makers, payment terms probably isn’t one of those things.
Q. If I eventually want to have my line in larger or nationwide stores, won’t I need to offer payment terms?
A. Yes, probably. But this is a great reason to grow organically, with a great group of independent shops first -- before trying to sell to Anthropologie. Once you are already selling to a great group of independent shops, you’ll (hopefully) have a large cash buffer and/or the ability to get credit, which will allow you to meet the payment terms of larger nationwide stores. It’s just not something you need to jump to from the beginning.
Q. Faire gives store owners Net 60 terms, so wouldn’t that be a smart way to resolve this tension?
A. Faire definitely advertises the availability of Net 60 terms to store owners, and I do think that this is attractive. One way to take advantage of that is to use your Elevate link -- that way, you don’t pay a commission, but store owners get the benefit of the payment terms. That said, we are hearing reports that Faire doesn’t always honor the 0% commission on Elevate sales. And there are other concerns about Faire to keep in mind that we wrote about recently. Finally, Faire says “Brick and mortar stores are eligible to apply for Net 60 credit terms.” That means that it is up to Faire whether or not to grant Net 60 credit to store owners. So not all store owners will get the terms… and the criteria Faire uses to evaluate store owners can become more stringent over time.
Q. Maybe I could keep it loosey-goosey?
A. Gah! Definitely not! Beyond anything else we talked about in this article, there is one ironclad rule: make your terms crystal-clear form the start. You can choose the payment terms that feel right to you, but your business and relationships depend on them being clear (and established in writing) in your Wholesale Terms.
The truth is that there is no one right answer for every business or every maker. Every person’s situation is different (which is why I take time every week to do 1:1 coaching with the makers we serve at Wholesale In a Box -- there’s just no replacement for hashing through each maker’s individual parameters.) There are financial realities -- if you’re providing payment terms, then you are lending money to stores. But what you do about those financial realities is up to you, and is part of the creative work of shaping your business in a way that feels aligned with your values.
What other questions do you have about payment terms? What have you found helpful and not-so-helpful when it comes to setting terms with retailers?