As Clients Take Longer to Pay Bills, Small Agencies Are Feeling the Pressure

Despite expecting more from their agency partners for less, marketers are taking more time to fork over cash for their services, a practice that’s disproportionately affecting smaller agencies with fewer resources. Payment terms, long a point of contention between brands and agencies, have increased in the past year, according to a recent report by the Association of National Advertisers. The survey of more than 100 marketers found that 37% have lengthened their payment terms in the past year, while 18% have shortened the wait time for payments. In 2013, agencies waited an average of 46 days for payment. Now, it's up to 58. In the report, the ANA pointed out that the “business models and livelihoods of smaller players in the marketing supply chain” can be threatened by extended terms. “Both marketers and smaller suppliers, in particular, need to proceed with caution to ensure that the terms of their relationship—including payment terms—are sustainable,” said the report, which notably came from a group that represents brand marketers. Smaller shops, often grappling with the unpredictability of project-based work and a reliance on freelancers, can especially feel the impact of longer terms, especially when clients use their leverage to delay payment for as long as possible. “I think all agencies go through this, but it does hurt the smaller ones much more than the larger ones,” Paul Crawford, owner of Birmingham, Ala.-based Scout Branding, said, noting that it’s awkward to have to call clients and remind them to pay. While Crawford said it’s not a massive problem for his agency, he said it “wouldn’t take long for things to get out of hand” if clients weren’t paying on time or taking longer than usual. There have been instances where he’s taken out of a line of credit to cover the gap when money should have come in, but didn’t. “When you have several clients that are doing that, it really can mess with what you thought you were going to be able to bring in, in terms of revenue for that month,” he explained. “That’s where it hurts.” [kickout id="2"] The chief operating officer of a New York-based independent agency, who asked not to be identified by name, said he’s seen payment terms go up in recent years, especially when contracts are up for renewal and clients take the opportunity to push for extensions. He said he’s had to push back and explain that agency fees will go up as a result. [article_summary section="1"]For him, the uncertainty that comes with longer and often lax payment terms makes it difficult to think ahead. “On the financial end, it makes planning really hard,” he said. “On the other hand, it also makes hiring hard. I’m not distrustful of my brand partners, but at the same time, I have to be conservative with financial decisions. I’m not really sure I’m getting money until it’s in the bank account. So I have to hold off on hiring decisions sometimes. It’s not whether [clients] said they’d give me the money—it’s whether I got the money.” One independent agency managing director who spoke on the condition of anonymity said she’s seen payment term proposals vary considerably over the past six months alone, anywhere from 30 to 120 days. She said the agency didn’t accept payment terms that asked for 90 days or 120 days. “While it seems inevitable that the 30-day payment term is next to extinct, pushing agencies beyond 45 or 60 days is unreasonable,” she said. “Because independents don't have the financial backing of a holding company, they aren't able to step into payment terms that other publicly-traded agency networks can sustain.” [article_summary section="2"]In the past, she said clients have made exceptions for her agency regarding faster payment times. But that doesn’t always pan out, as brands often don't have the internal ability to actually make that happen. [kickout id="1"] “We have seen some clients make an exception for us, but sometimes a client is unable to pay based on the shortened duration of time, as their internal teams couldn't move that fast,” she explained. “If they do pay on time, it requires more hustling internally to ensure the agency is paid more quickly than all other vendors.” Some agencies are dealing with an even worse problem: clients not paying altogether. One agency executive, who asked not to be identified by name due to pending litigation with a client, said the biggest issue they’re facing right now is “clients going completely dark on payments.” The executive said the issue primarily concerns two clients at the moment, one of which the agency is in a lawsuit with. “We’re in a costly legal situation, which is further pain against the agency when you’re already missing income that you’ve anticipated, especially in a project-based world where you’re operating on a very short pipeline,” they said. While they’ve been able to shield “the majority of the agency from feeling the impact of any of it,” that’s not to say employees haven’t taken notice. “We run a pretty stable business and we’re able to pivot accordingly,” the agency executive said. “But as people catch wind of this type of treatment, it certainly affects morale and makes any sort of further work for these types of clients difficult to rally people for.” As small agencies come up against these problems, they often find that there’s only so much they can do considering clients wield the upper hand. The ANA report, for example, states that there is a “perspective that marketers can ‘push harder’ for extended terms for project work, especially with new agencies, because many agencies will accept such terms to get a foot in the door with a marketer.” [article_summary section="3"]Jonathan Schoenberg, executive creative director and co-owner of TDA Boulder, said that clients who opt to partner with smaller shops because of attributes like “speed, price and creativity” should recognize that the efficiency they demand of their agency partners deserves to be reciprocated: “They’re such hypocrites to then turn around and be like, ‘we’re going to pay you slowly in a way that’s not thoughtful.”