What Should be Your Payment Terms?

Today's post is an answer to a designer's question about payment terms.
Janette Hanna asked Boaz:
Hello Boaz, I wanted to learn about a document/contract? for terms when taking orders from boutiques. I would like to show them a document with clear terms, ie pay 50% on order, 50% upon delivery. Are 50/50 terms used? J. Hamill says to charge the their credit card for remainder the day you send the order. Not when they receive the order. Needing clarification. 
Boaz's answer:

As a start-up fashion brand, deciding on your payment terms is an important business decision, and one that you should make prior to approaching buyers and definitely prior to taking orders. Being the manufacture of the product you will need to cover all production cost up front and prior to shipping which require you to carefully manage your cash flow and that can be greatly impacted by what payment terms you extend to retailers.

On the same note, managing the relationship with your retailers is also an important part of building your business especially at the beginning stages. So when deciding on your payment terms you will need to find the balance between choosing terms that will assure you will get paid but at the same time will not scare away buyers.

This becomes a delicate decision because your main goal as a start-up is to get your foot at the door by having buyers and customers test and experience your products. Later on once your business is more established and customers are seeking your product you can adjust your terms and be a bit more strict about them.

To help you with that decision let’s look at few of the common options to consider for payment terms:

  • Deposit - Accepting a % (30-50%) as a deposit and the balance is due when order is ready to ship. These terms will help your cash flow for production, however might be hard to get buyers pay a deposit on your first season.  
  • COD (Cash on delivery) - the customer pays when the order is delivered to them. All carriers (UPS, FedEx, U.S Mail etc.) offer the option of collecting a payment when delivering a package. No payment - no delivery.
  • CBD (cash before delivery) - With these terms payment should be accepted by you prior to shipping. You can either ask for a credit card to keep on file and charge when the order is ready to ship, or wait to get a payment (check, money order, PayPal etc.) before you ship the goods. A good way would be to ask for a CC info when the buyer is placing the order (or prior to you producing their order).
  • Net terms (10-30 days) - prior to CC being easy to accept net 30 were the default term. The buyers liked it, but unfortunately with the change of the economic climate over the last 5-7 years these terms became a bit challenging for start-up brands to implement. So If you choose to offer net terms we recommend to ask the store for credit references which you can call and check on, and more so ask for a CC info to keep on file which you will be authorized to charge in case a payment is delayed.
  • Consignment – with these terms a store will not really purchase your product but more like borrowing it for a an agreed time period (end of month, season etc.), and at the end of that period they will pay you for the items that they sold and return any item that was not sold. That is not the most recommended payment terms for many reasons, however as mentioned above if the goal is to get your foot (product) in the door, than strategically it might pay off to do that with a great store if it is your best way to get your foot in their door, but do not offer this more than one season as an ongoing payment terms.

Once you decide on your terms make sure to have them clearly written on your order forms and more importantly be clear about them with your buyer when they place their orders with you. You want the buyer to be aware of the terms and approve them so everyone is on the same page, it will save you a lot of time later on and will help you avoid producing an order that you than find yourself chase the buyer to figure out the payment terms for it.

Note that the above scenarios are normally apply when working with small boutiques, but when it comes to department stores and big chain stores the terms will most likely going to be suggested by them and will include net terms (on average 30-45 days) and other options. For the most part at that stage though you will be using the services of a factor which is a company that will check the store credit for you and guarantee your payment.

As I mentioned above, at the end of the day you should look at each case separately and decide if it is beneficial for you to be flexible in that situation, what are the long term benefits etc. If you do decide to offer better terms to a specific store keep in mind that 1. you  only want to do it 1-2 times and when the store comes back to order again, you should then revert to your usual terms. 2. Word travels If one of the other stores you are selling to will hear that you gave better terms to a specific store, they might ask for the same.

**Tip – This tip is from personal experience, we all have our six sense which we don’t always listen to, but in this case I would, and if you are really worried that a store will not pay you, unless you secured a payment terms that protects you then don’t ship them at all.