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 or 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.”
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.
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.”