It’s no secret that large brandstake their time to pay their bills. Why? Delaying payments for a few months allows advertisers to realize the return of their investment prior to issuing payment for the ads. Companies that fall in the daisy chain of payments with brands are feeling the squeeze the most.
Two of the largest brands in the world, P&G and Mondelez, have independently announced they are extending payment terms to vendors and agencies by an average of an extra month. That’s a full 120 days -- and a huge liability for businesses juggling payments to keep their operations afloat.
The news about these extended terms does not signal the start of a trend -- it is confirmation of a new industry standard. The ripple effects are having a serious impact on the financial stability of the broader advertising industry -- a topic that not many want to discuss.
Recently, a large digital agency was unwilling to talk publicly about having a finance solution because they felt it made them look like their "business was struggling." Which led us to wonder -- how many in the industry feel the same way? Why is talking about cash flow challenges such a dirty secret when it’s the lifeblood of every company?
How did we get here? Payments first came to a crawl in 2008 when the economy was in disarray. The recession forced companies to slow their payments, but the prolonged payment terms were so convenient for the large brand advertisers that they became standard in the industry with the added benefit of increasing their own cash surplus.
The companies with the strongest balance sheets are the ones driving this new standard. Johnson & Johnson has a system that pushes payment up to 75 days, and Anheuser-Busch InBev has standard payment terms of 120 days (4 months!). What is financially convenient for P&G, Mondelez, or J&J, cripples agencies and digital media companies who rely on deals from these big brand marketers to survive. Payment lag isn’t just a problem felt by the smaller agencies -- it’s a problem for everyone in the advertising space.
So what are the options for companies in the digital advertising space to overcome payment lag?
Banks offer the most traditional and least expensive capital, but they lack flexibility and can be difficult to access. This may be the preferred route if your business has been in existence and profitable for several years,
Raising Capital - Raising money via angel investors, venture capital, or private equity has become easier/more popular due to increased interest in the technology sector. Every type of investor is looking for the right business to pour money into in hopes of having a big exit. You probably don’t want to dilute your ownership, but wouldn’t you rather own 75-80% of a large and flourishing business than 100% of a floundering one?
Factoring, or financing trade receivables, allows business to leverage the strength of a big brand’s credit rating to generate liquidity. The interest rates tend to be a bit higher on factoring transactions, but it’s a good option if you prefer interest over ownership.
Stretching Your Own Terms - or “pass the buck,” as they say. Now is the time to stretch out your own terms if you can. If this isn’t possible, you can use a trade finance platform to offer quicker payment to your vendors without needing to tap your own cash reserves.
The advertising industry is growing exponentially, with new technologies and innovative players coming into the market. Cash is king in this business, and if your company’s cash is locked up in payment purgatory, it puts your business at risk of missing opportunities to grow. This movement toward slow payment cycles isn’t going to stop -- so now is the time to develop a new strategy to cope.
· Do your homework: Investigate all financial options based on cash flow needs.
· Review terms: Take a look at your own payment terms and determine if an adjustment is needed for long-term financial strategy.
· Tap your network: Connect with other business leaders to find out what solutions they have in place.