What often goes unreported is the fact that the big money that comes from bigger projects or bigger clients also takes longer to reach your bank account.
In other words, bigger clients tend to take several months to pay you. In turn, it might put your business in a tricky situation when you realise you are short on cash to pay your staff or suppliers.
In this article we look at the issue of payment terms and why creative agencies should really think about the bigger picture when it comes to managing finance.
Creative sector relies on a reliable network of suppliers
The creative industry comprises of an army of small and medium-sized agencies. In turn, these agencies use the services of countless suppliers from freelancers to other creative firms.
At the top of this chain sits the end-client with a big finance department and sometimes unbearably long payment terms.
This can become a problem: your client’s view of when it’s time to pay can differ enormously from when your contractors and suppliers expect you to pay them.
Unfortunately, it’s them that call the tune. And if your client is overseas, things can get difficult.
Dan Day, founder of creative motion graphics firm Invisible Artists, said;
In China and many other Asian countries, it is standard to take 90 days to pay for services. If you need to pay your own staff today but have to wait another two months to get paid by your client, it can cause a real problem in your cash flow. Let alone when clients are late to pay.
What if you don’t pay your suppliers on time?
When you are late paying your staff and suppliers, you run the risk that they won’t want to work with you anymore.
Finding new and reliable people can become a challenge. Especially, when you have ongoing projects in the pipeline. So, when your client doesn’t pay you it’s not just you that suffers, it’s your staff and your outsourced agencies that experience the knock-on effect too (who knows how many additional staff they had hired to deliver your project?).
This is why seeing your business in light of your entire supply chain is important. If you don’t get paid at all, an entire chain may collapse. This risk has always been there but it’s growing.
UK businesses have said as much – just look at YouGov’s latest Supply Chain Funding index (SCFi).
In the SCFi UK businesses rated the supply chain at 6.2 on a scale of 0 – 10. Put simply, UK businesses admit they’re running a near 40% risk of disruption in their supply chains because of the payment terms.
So, it seems you have a stark choice: take it on the chin and carry the risk, or walk away from lucrative contracts because of the risk. Many have walked away.
You could always borrow
It’s true, you could ask your bank for an overdraft to see you through until your client pays your invoice. However, for a while now banks have been a bit reluctant to lend to small businesses: they view it as a bit risky for not much return.
If your bank won’t help you can always try invoice discounting or factoring. Just like a bank overdraft, both can mean debt – as you would typically end up borrowing against an unpaid invoice. Added to that, both will typically demand personal guarantees.
Propping up a business with debt is not a viable long-term strategy. Dan Day of Invisible Artists notes ‘When I started looking into bank facilities, I realised I will have to hire a full-time employee to just look after this side of business. This is why I opted for a non-bank fintech solution.’
Alternative funding solutions without debt
The good news is that over the last 5 years the UK has undergone a huge influx of new finance solutions – fintechs. It has given businesses access to finance where they previously had none.
If you look at Funding Xchange, Company Funding Options or URICA – you’ll find a number of different finance models which can meet your needs and protect your business when you have your next gig lined up.
But be sure you fully understand the terms and conditions of these alternative funders. What businesses typically overlook is whether the funder requires personal guarantees and how easy it is to terminate the contract.
Laura Gregory, founder of international film production company Great Guns, said;
As the creative sector continues to adapt to new technology and growing demands for value from all customers, it has never been more important to find the right supply chain funding.
Laura of Great Guns believes good funding can help creative agencies better prepare for the future.
You can’t give customers the value they demand if you can’t be sure of your cash flow.