4A’s urges agencies to stand against long payment terms

The 4A’s is urging ad agencies to take a stand against long payment terms as marketers increasingly push for 120- to 180-day payments. In a new report, “The Ripple Effect of Extending Payment Terms,” the trade organization representing U.S. ad agencies lays out why these long payment terms are not sustainable for shops or conducive for creating good partnerships. It also urges agencies not to accept supply chain financing, a program clients are increasingly leaning into. Supply chain financing occurs when third-party banks agree to pay the agency what is owed by the marketer. But if the agency wants the payment in a reasonable timeframe, according to the report, the agency, not the marketer, must pay the high interest rate on the money to the bank. Ad Age Media Summit Hear from industry leaders during October event in NYC Register here Long payment terms, ranging most commonly between 90 and 120 days, result in agencies waiting roughly three to four months to get paid by a marketer for a project. These terms are not necessarily new, but the pandemic in a lot of ways normalized these types of terms. In 2020, agencies reported that almost all their clients were delaying payments, even those with strong cash flows at the time. At the time, 120-day payment terms were the most egregious but now 180-day payment terms are starting to pop up. In the worst payment terms scenario that has been publicized, Keurig Dr Pepper stipulated agencies competing in its U.S. PR review last year agree to 360-day payment terms, or obtain financing from a third-party bank if they win the business. “The pandemic took what was already happening and accelerated it,” 4A’s President and CEO Marla Kaplowitz said. “It’s not common, but I have heard of a CPG [client] that asked and pushed for 180 days. That has a knock-on effect for the agencies when you look at their cost structure.” More news: 7 ways agencies can market themselves better to clients Roughly 75% of an agency’s cost base consists of monthly salaries and related payroll expenses, while the remaining costs include taxes, rent, telecommunications, utilities and the ongoing general expenses of operating a business, according to the report. It said that “agencies do not have the luxury of passing the burden of extended payment terms to their employees, landlords or utility companies.” Agencies waiting several months to be paid by clients may need to seek out loans to cover their ongoing expenses. “The amount that would have to be borrowed [for longer payment terms] would have a crippling effect” on the industry, Kaplowitz said, adding that these terms are also coming on top of the fact that many clients are not paying their bills on time. For production costs, where shops have expenses up front, the report advised that “clients should be invoiced at minimum 50% of the estimate at the start of the project with payment timed to achieve cash neutrality.” Agencies ‘should not be hired to be banks’ The Association of National Advertisers, the trade group representing marketers, as well as consultants, have advised against long payment terms. “While the ANA does not recommend any specific payment terms practice, there have been situations that have crossed the line,” ANA CEO Bob Liodice wrote in the report. “Agencies are hired to drive business results—they should not be hired to be banks for client-side marketers.” The 4A’s has been working with the ANA on developing training for procurement executives on how best to work with agencies, and they are considering payment terms as a component of that training, Kaplowitz said. Tom Denford, CEO and co-founder of agency search firm ID Comms, wrote in the 4A’s report that he’s witnessed several agency-client relationships break down because of “unreasonable payment terms.” “Even in an age of algorithms, we observe that so much of the value delivered from agencies is still discretionary and based on people and relationships,” Denford wrote. “Agencies tend to have preferred clients and it is these clients that invariably get access to the best talent, creativity, first-look opportunities and innovations.” More about agencies: Meet the CFO who is also a romance novelist Supply chain financing Banks including Citibank, JPMorgan, BNP and Bank of America have made it a business to offer programs where they pay invoices on behalf of companies to vendors, including agencies, to get them paid before 120 days, if that is the stipulation, the report said. If agencies want to get paid in 30 days, they will get a lesser amount under these programs. The amount the banks keep is based on an interest rate, which was 7% in the case of Keurig Dr Pepper’s PR review last year, Kaplowitz said. She said they have likely gone up since then as there has been a spike in interest rates this year. Meanwhile, “clients get a cash boost when they pay the bank later in 120 days,” because the bank earns revenue on interest, according to the report. The agencies incur the interest. The programs allow for the banks and marketers to reap the benefits at the agencies’ expense. “With supply chain financing, you are getting these companies to say to agencies, ‘You take on the loan, the interest, the liability,’” Kaplowitz said, noting how these programs could also violate an agency’s debt covenants with their own banks, which tend to be exclusive. “What if the roles were reversed and one of [the marketer’s] distributors needed extended payment terms and offered supply chain financing? How does that work?” Also read: Ad agencies posted their strongest job growth in a year Kaplowitz said agencies have to stay strong in their stances against supply chain financing and long payment terms. “Agencies need to remind clients they are in business, too,” she said. “In the same way the client is looking to be profitable and healthy, so too is the agency.” Ad Age Salary Guide The hottest ad industry jobs and what they’re paying Read more here Kaplowitz said these terms especially impact small and diverse-owned agencies. “They can’t afford to be in business this way,” she said. Some agencies have been giving into longer payment terms, thinking there are no other options. “Gone are the days of 30-day payment terms,” one ad agency executive told Ad Age, noting he’s had to be “flexible” in accepting alternative options. Kaplowitz said she can’t tell an agency how to conduct its business, but marketers will try all sorts of tactics to get agencies to concede, including pitting their various agency partners against each other, essentially telling them that if they deny the terms, another shop will agree and do the work instead. Agencies have to consider whether these are the types of clients they want to work with, she said. “Clients are pushing harder and harder,” Kaplowitz said. “Clients will throw all sorts of rationale out there about why it’s going to be this way. You have to be firm. Generally, the types of companies asking for these extended payment terms are multi-billion dollar corporations [that] want to look more attractive to investors.”

4A’s urges agencies to stand against long payment terms

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