Payment term demands risk agency failure, says Kingston Smith W1

21 August 2014 / Insight posted in Articles

A new survey by Kingston Smith W1, accountants to the creative industry, reveals the extent of an issue affecting agencies across the board: widespread client demand for increased payment terms.

  • Survey shows nine out of ten creative agencies have been asked to extend payment terms, with some clients demanding six months’ credit
  • Two thirds of agencies unhappy with payment term extensions and supplier finance schemes
  • Yet, agencies find it hard to resist client requests – only 5% of those surveyed refused extended payment terms

Based on responses from over 100 managing directors and financial directors in the marketing services and media sectors, the Kingston Smith W1 survey showed that 91% had been asked by a client to extend their payment terms, demonstrating that the issue is extremely widespread. While most were asked to extend up to 90 or 120 days, 8% were asked for 180 days’ credit. In the worst cases, this could be sufficient to cause any business to fail.While almost two thirds of agencies (64%) tried negotiating with clients over these requests, only one in twenty refused to extend their payment terms – and more than one in five (22%) accepted without negotiating. Kingston Smith W1 believes this is often due to agencies’ desire to maintain a good relationship with their clients, and possibly because they had no option; either they accept the new terms or lose the work.

Overall, roughly two thirds of agencies surveyed (65%) said they are not happy about the payment term extensions and associated supplier finance schemes, believing they adversely affect the whole supply chain. A similar proportion of respondents feel that businesses should be putting up a fight, with some looking for government intervention to alleviate the situation; seemingly unaware of existing legislation. The 1998 Late Payment of Commercial Debts (Interest) Act enables businesses to claim interest and debt recovery costs if another business is late paying for goods or a service, yet businesses rarely implement their rights in this respect. Kingston Smith W1 believes this may be due to a worry that taking such measures will be damaging to the relationship with their client.

Commenting on the dilemma facing agencies around late payment, Mandy Merron, partner at Kingston Smith W1, says: “Like any service business, most creative agencies have two main overheads – building costs and staff salaries – neither of which can be taken on credit. This leaves businesses with nowhere to go.”

She advises agencies: “Be bold. Decide with your Financial Director what payment terms you can afford and stick to your guns. Don’t agree to work with companies that won’t pay within your agreed timescales. Although this might reduce your pool of prospects, if all agencies implemented such a rule, companies would stop requesting these late payment terms.”