[god_bless_texas]

I chased and successfully won a huge customer for my small and fledgling startup. I chased and successfully won a sole service contract for a key part of their business process. I allowed a credit situation with them to grow over the course of 3 months while I allowed them to have 60 day terms. And then, they went out of business and left me holding the bag with $150,000 in unpaid AR after I spent $90,000 generating that AR with them.

The lesson is never trust the size of a company as sufficient reasoning that they can and will pay their bills.

[MisterOctober]

^ this is real talk. Big companies love to be behind on AP for a variety of reasons, among them:

- Their own 'highly matrixed' organizational structure makes it near impossible to find 'the correct person' to talk to about accounting issues, let alone get a straight answer out of them - so chasing these issues down becomes a huge drag on your time and energy and you may very well just give up after a while

- Past-due invoices are typically penalized with tiny interest percentages [in the <2% range], so even if they do intend to pay eventually, they can gleefully treat you as a bank with really low interest on short-term loans.

- They know full well that you, the small company, probably aren't willing to put up the massive time and dollar resources in order to sue them, the big company, for what is to them small potatoes. They have a bench full of experienced attorneys, you might have a single one, and they know exactly how to extend and complicate a legal process such that the litigation itself costs you far more than the outstanding AR.

[tptacek]

A lot of this is probably true, but it's really to your benefit to understand, as a businessperson, that this is generally how large clients expect to conduct business. You can fight it and even establish better payment terms, but it isn't always worth it. It's usually cheaper just to build a business that is resilient to late payments.

Over the last 15 years or so, a lot of my best customers have been super-late payers. You take the good with the bad.

[caro_douglos]

To double down on this it's worth finding out how the customer within the large company pays for things. Sometimes it was easier to get an annual or quarterly contract because that's how a company's accountants dealt with that employee/department's business expenses.

[subhobroto]

I used to think that offering a 10% discount on invoice to clients for payments within NET30 would motivate them to pay early, but very few clients, specially those complaining about expenses ever made good use of that.

Has this been your experience as well?

... and do you "outsource" your AR for a % of your invoices?

[tptacek]

I really don't think we even think about it that much. We have terms in our contract, and we send emails when payment is due, but it's not like we'd ever flip out if someone was late.

You can try setting late payment penalties, but my experience has been that client procurement and legal people get those stripped off routinely.

At Matasano, I remember one of our anchor customers taking something close to a year to pay an invoice.

[subhobroto]

> You can try setting late payment penalties, but my experience has been that client procurement and legal people get those stripped off routinely.

That at best. others just "forget" about the late payment penalties in my experience.

The sibling comment from @mrhappyunhappy is interesting but when I tried it, clients would rarely pay the premium.

[mrhappyunhappy]

As a consultant I state that I will charge a 10% late fee for every week a payment is late. I’ve never had a late payment. I’d say offering a discount does the exact opposite.

[subhobroto]

Clients past a certain size just "forget" about the late payment penalties in my experience, which is why I offer a "on time" payment discount.

I tried both methods and clients would rarely pay the premium compared to those who would avail of the "on time" payment discount.

I have less happier clients when I make them pay a fee than when I take away a discount although mathematically they are the same number.

[jjeaff]

That just gave me a flashback to my college accounting courses. So many examples where a discount was offered for on time payment. Must be a reason that technique has been around long enough to be a fixture in accounting textbooks.

[tixocloud]

From big co perspective, absolutely true. Tons of other priorities to get out of the door than paying on time. Our invoice process was dreadful. Thinking back, if a vendor made it easy for us, we might always pay on-time!

[tptacek]

How big is your average client and how heavily utilized are you? Your experience is very different from mine, but I may be working with larger companies (or you might be working with an idiosyncratic subset --- I don't think I am, though).

[mrhappyunhappy]

I work with companies 1-50mil in revenue typically. I don’t know what the law is when it comes to late fees, the language is mostly there as deterrent. That being said I am VERY picky about who I work with so I’ve never had a late payment or nonpayment, I suspect that’s more due to the screening process than the language in contract. If I ever had to actually charge a 10, 20 or 30% late fee, I would not pursue it and choke it up to a business loss and forget about it, move on. Cost of doing business.

[koolba]

I’m pretty sure that violates most State usury laws.

Note that I’m not referring to charging interest for late payment as being illegal. I’m specifically referring to charging 10% compounded weekly, which comes out about 14200% annualized.

[tptacek]

Probably not. Even in states that don't exclude fees unrelated to an actual loan of money, it looks like contracted late fees between businesses are excluded from usury definitions (that's the case in NY, for instance).

[newman8r]

I'm curious if there's any examples of this ever happening. Some company keeps ignoring a contractor's requests for a couple of years and ends up owing ~$20 million on a thousand dollar debt.

But like you, I'm pretty skeptical. Probably wouldn't hold up in court.

[bitexploder]

We service Fortune 50 customers in a similar business to what Matasano did. This side of the business is definitely harder than the hacking / technical work. It can be tough to deal with and structuring bigger deals is important. Fast payment is not only important to not being at risk, but a short cash conversion cycle is basically more capital available at lower revenue. Kind of like velocity in the Agile dev world, only for money. There are diminishing returns (edit: in attempting to lower CCC) and large customers will throw you into the meet grinder that is their AP.

[MisterOctober]

No doubt about it. An effect of the behavior set I describe above [and I was only describing them -- I've been on both ends of that phone call over the years] is that in these relationships, the established payment terms are kind of irrelevant to the way things actually play out.

[subhobroto]

You are getting me really curious now.

I have tackled this issue (late payers) in two ways:

1. My cashflow from other investments ensure I did not run out of money. This is a bad design where I am effectively extending a 0% APR loan to the client with a term of their choosing

2. When I have ARs large enough to entice "parties that handle payments", I choose to let them handle the invoices on my behalf for a cut. A pretty large cut but 80% is better than 0%.

I am effectively looking for a way to optimize the later but happy to hear alternative solutions, specially when the ARs are not large enough to outsource.

For a bootstrapped business, this cashflow can be critical.

[tptacek]

I mean, if you're careful about who you work with, 0% isn't really a meaningful risk. Bank of America (or, for that matter, Airbnb) isn't going to default on you; the pain the ass you could generate if they did would cost more than the invoice.

[subhobroto]

Agreed with a caveat. Having actually worked with BofA, the amount of overhead for a contract could have put me out of business if I was not a BIG5 employee.

The big boys are not even going to consider me unless I am a safe choice (they really don't care if I am a kickass programmer who can solve their problems - they want to do business only if I am a known quantity so that they don't get fired if a deal with me go sideways).

I am really lucky to have positive cashflow because I can be picky about clients but a lot of friends ask me how to get started and my experience with cashflow is that a fantastic business with client set A can absolutely fail compared to the exact same business with client set B just because of cashflow issues.

Maybe I am too old and jaded but now I always ask people to include and test for cashflow in addition to the efficacy of their business ideas vis. market fit.

Honestly though, this becomes too demanding of entrepreneurs who are already overworked with lead gen, product design and development as is.

You should definitely write a few articles about cashflow. People don't write about it enough.

[kenneth]

You can always ask for a retainer, too.

[subhobroto]

Bingo. One of my favorite gotos. Any more ideas?

I size the prices with the retainers. Bigger the retainer, higher their priority and less the per project prices.

[kenneth]

You can get credit specifically to solve for that issue, usually at reasonable rates. Short-term small business loan facilities exist. Another decent option if you're reasonably sure you'll receive payment NET30 are credit cards + an online bill-pay service like Plastiq.

[subhobroto]

> receive payment NET30 are credit cards + an online bill-pay service like Plastiq

I personally have helped out a few businesses with a 2% CB CC (which helps offset the Plastiq fees) that offers a 6-mo 0% APR term but the CL is the limit of the loan which limits the extent of the loan.

Most CCs don't have such gracious terms in which case you could be paying a hefty fee to gain that cashflow.

Having done this a few times, my conclusion is that this is a very bad practise and exposes a business with cashflow issues if this is a regular occurence.

A healthy AR is better than no AR but you know what's even better?

A healthy cashflow.

[notyourday]

Turning off a customer and refusing to turn them back on until the wire hits the account solves all kinds of problems.

[subhobroto]

Might not work in all cases.

I have excellent clients who could not afford to pay for a consultation because they themselves were waiting on the client they were farming out jobs from.

They still work with me because they know I understand their cashflow issues.

[notyourday]

That's a self-created problem. It is possible to remain in business while self-creating problem. It is, however, not recommended.

We once were jerked around by a reasonably well known customer. Their accounting people decided they did not need to perform under the payment terms the customer signed off on. First time they did it, I sent an email to the EVP that signed the order. We got an apology and a payment. The next month the same thing happened again - we redirected all their traffic to "We are unable to process your request - please contact your account coordinator to restore access" message and did not remove it until the wire hit our account ( 5pm-8:02am ). We received a letter with apologies from the customer's CEO, customer was saved and they never missed a payment again. I heard, via the grapevine, that three people at the customer's AP group were shown the door as the result of our message.

[Drdrdrq]

I admire you for taking a stand, and even more for being able to climb into a position where you could pull this off. Kudos.

[restalis]

This really irks me. Are you my customer or are you some kind of onerous business partner so that I have to share the consequences of your business decisions? Sorry, get a bank loan and pay me, then solve the rest of your problems with your client and the bank (i.e. without me).

[tonyedgecombe]

That's been my experience, just the threat of turning it off has a way of unblocking the system. I usually start with the users of the system who are often as frustrated with the system as we are.

Having said that I mostly don't offer credit terms anymore, my average order value is about £500 which means it isn't worth the time spent chasing late payments. In 99% of cases the customer will find a way of paying upfront.

[GFischer]

they can gleefully treat you as a bank with really low interest on short-term loans

Exactly. On MBA finance courses (and I guess CPAs too) you're taught about working capital - and one half of that is basically stretching supplier payments as far as you can.

[edoceo]

Some of these tricks are laid out in "Das Kapital". I found that book to be very educational.

[cube00]

> They know full well that you, the small company, probably aren't willing to put up the massive time and dollar resources in order to sue them, the big company, for what is to them small potatoes.

If they are well known enough surely a well placed social media post is all that's needed to oil the wheels.

[cm2187]

Also large organisations tend to be horribly bureaucratic, with multiple layers of authorizations and people who happily sit on everything for weeks before they even consider lifting a finger or responding to an email.

[Fiahil]

My previous employer was asking money upfront, the late payment problem was still here and kicked down the road until renewal, but at least the first year was payed in advance which allowed to bootstrap the business.

[maerF0x0]

>Past-due invoices are typically penalized with tiny interest percentages [in the <2% range]

That 2% is usually monthly, so the APR is more like CC debt, not bank loans.

[randomsearch]

(NB not criticising you here, but pointing out a cultural problem).

This is a classic cash flow problem in business. Any very simple (usually free) “start a business” course from local government in the UK will cover this. I went on such a course and they explicitly talked, in detail, about this issue. They flagged it as a major cause of business failure.

Point being not to criticise the parent but to emphasise that startups are not different from any other businesses when it comes the basics like cash flow. Something that really stands out in the startup world is how little regard is given to the simple everyday business issues that business advisors the world over teach about every day. Anyone starting a tech business should do a simple course on business basics, in this example it could literally have saved the startup for an investment of a few hours.

[the_clarence]

Can someone in this thread summarize what are the terms? AR, AP, APR, retainer, etc.

[flaviojuvenal]

AR/AP: https://www.diffen.com/difference/Accounts_Payable_vs_Accoun...

APR: https://en.wikipedia.org/wiki/Annual_percentage_rate

Retainer: https://www.investopedia.com/terms/r/retainer-fee.asp

[tixocloud]

AR: Accounts Receivable (money owed to you)

AP: Accounts Payable (money you owe)

APR: Annual percentage rate (usually converted from a different timeframe so you have a consistent timeframe to compare with other metrics)

Retainer: A fee that you pay to get priority from a consultant, which may or may not come with services included.

[michaelbuckbee]

There's another overarching term that needs put in here:

Cash Flow: the balancing of AP and AR so that you can stay afloat.

Say your startup needs $10k a week to meet payroll. You have $20k in the bank and Accounts Receivable of $100k. "On paper" you have $120k. Cash flow wise you have 2 weeks of money left on hand.

This situation is in constant tension as:

- Large companies stall regularly on paying or require terms like "Net60", aka you complete the work, then send them an invoice, then they can take 60 days to pay that.

- Public companies have to report their financials and will often manipulate their AP schedules to help "massage" their numbers. I was once told bluntly: "our CFO said we aren't paying any more invoices this quarter"

- The reason large companies do this is they are also trying to balance their cash flow (just at a larger scale).

The two general things to do to help with this situation:

1. Keep invoicing tight, bill as often and in as small as increments as possible. Better to ask for $20k every 2 weeks than $40k at the end of the month.

2. Offer discount terms where they pay less if they pay earlier.

[tixocloud]

Well said. Very common scenario when it comes to retail, grocery stores, import/export businesses.

Great article on this topic by Tomasz Tunguz of Redpoint Capital: http://tomtunguz.com/timing-sales-cashflows/

[burlesona]

I’ve been through something very similar, and I know how much that bad to hurt. Hope you’ve had time to rebound and recover, and thanks for sharing your story!

[numbsafari]

I’ve seen similar situations in the past. My experience has been that small business will get excited about “hitting it big” and allow a massive customer to suck up all their resources to the point where sales and marketing are put on hold or altogether stopped, leaving them totally dependent on that one customer for cash.

I’m curious if your experience in this case was similar.

[kryogen1c]

This is something my IT MSP does that surprised me: if one of our clients doesn't pay their bill, we stop servicing them.

Even more surprising is that it happens pretty frequently.

Companies (small to medium) aren't some machine with automatic parts; it's just people, and sometimes people don't pay their bills.

[goatherders]

Had the same situation and thankfully had a lawyer that was able to get back 90% of what was owed in about 90 days. Big companies dont recognize that there are people at the end of their invoices sometimes. Sucks.

[beilabs]

A single company I had a long term business relationship had a similar issue with me. Thankfully I had moved to a developing country and was able to bring costs way down as a result. If I had stayed put, back to work in a cubicle for a time I guess...

[cataflam]

I'm curious, how much would you have paid to be protected from this kind of risk and make sure you'd get your money?

[jwatte]

Isn't that what factoring does? That's a well established line of business for a very long time.

And because you sell your invoices, the factor now takes the payment default risk.

Does cost a penny though.