B2B Terms of Trade

There is a very dangerous practice occurring in business. It has for a very long time; before the Middle Ages in Europe, before the Romans, even before Gilgamesh was gadding about in Sumeria. Because the practise is so old it is considered "the way it is and should be" by most. Of course if you get in a logical discussion then most people will admit that it is unsupportable and wrong. But it persists.

The practice is "Payment Terms" - the type of payment terms where one company provides a product or service and the other doesn't pay for it till some time in the future. Do you see the problem? It lies in the concept of value. When a product is passed to a buyer the value of that product transfers instantly. When the payment for the product does not occur till later then the value to complete the transaction is held back. The transaction has not really occurred till payment is made. Which begs the question as to why the buyer should have the value of the product whilst withholding value to the supplier.

Now we all agree that to have a Win Win both parties must profit equally in a transaction. When value is held over then it is not truly possible to have a Win Win because you will see that every day value is outstanding is actually a win for one party and a lose for the other. By the time the accountant's books "balance", the selling company has lost a lot of earned value and the buying company has gained a lot of unearned value.

Deferred payment is causing one business to lose money at the hands of another. There is no other honest way of seeing it. If you do choose to set a delayed payment then insist on interest to equal what a lender would get then the transaction will be fair to all.

Looking at the phrase "Payment Terms" in the Business Dictionary:

Conditions under which a seller will make a sale. Typically, these terms specify the period allowed to a buyer to pay off the amount due, and may demand cash in advance, cash on delivery, deferred payment period of 30 days or more, etc.

is very interesting because it clearly says that the seller gets to set the terms. Anyone in business knows that in reality the buyer tends to set the terms. What has gone wrong?

A quick (and slightly dubious) history of trade

5,000 years ago Gilgamesh's grand pappy proclaimed to farmers that they had to give him their crops and he would pay them gold from the treasury at the price he set. Farmers who didn't like the price were beheaded.

4,050 years ago Gilgamesh's dad realized that the time between giving the farmers their gold, cart the grain to the folks over in the Indus valley and get back was long. He was out of pocket from purchasing his grain till Old King Gautama forked over his gold and his traders donkeyed it back. What if he he simply didn't pay the farmers till he got his gold back from King G? A cunning plan indeed. No-one of any importance was out of pocket at all.

4,040 years ago there was big riot brewing in Sumeria. The internet was abuzz with the anger over how farmers were starving whilst waiting till their gold came back from the 3 year journey. Some farmers didn't have the money to plant a new crop. Some got loans at 25% interest from Gilgamesh for seed. Others simply couldn't afford to live and sold their children into slavery. The revolt failed because the King pointed out that anyone who didn't like it could either be tortured & killed or turned into a slave (after being tortured of course). That seemed a pretty persuasive argument and settled the deal for all eternity.

Back to the future

This is the historical part of the argument companies use for insisting on setting deferred terms of payment to suppliers and still very close to modern practice. The real argument however has nothing to do with history and more to do with the future. Businesses are scared of the future (by this I mean the people in them) and feel that the only way to be sure is to set terms that:

a) use none of their own resources

b) keep suppliers weak and unable to either compete with them outright or demand better terms

The argument is that "If we can't have 90 day terms we cannot afford to buy the product. Seems compelling but in reality it is B.S. If the deal is sound the banks or other business lenders will lend for 90 days between supply and sale. The larger businesses are simply acting like warlords because they can get away with it. Because the supplying businesses are also frightened of the future. They accept these unequal terms simply because:

a) a sale with a delayed payment must be better than possibly not getting one at all

b) if we don't do it a competitor will and we will have nothing

There is no way to have direct power over the future. Every attempt will fail. Life cannot stand still. You can't hold time. However, there is a way to ensure that you live free in the future and that is to live free now. Simple as that.

In sad practice

Today I got an email from a client with a delinquent account who I was re-familiarizing with my Terms of Trade: 'Payment in Advance', something already agreed upon. The email said:

"I understand that be (sic) what you publish but in reality not the way people do business.. I have set the terms which is the only way we can work.. I don’t have the time to run around getting payment for something that hasn’t happened before I need it done.. Let me know"

So what do I do? Let this business define my terms of trade for me? It is tempting because in tight times clients are money right. But clients who use my precious time and expertise without honoring agreements are not great for either my my self-esteem or bank account. As someone said to me recently: "Handing over a product you aren't getting payed for is not doing business it is starving yourself".

This reminded of the reason I set 'payment in advance' in the first place. Jonar Nader wrote in his excellent book "How To Lose Friends and Infuriate People" about this very issue of not exchanging value for value at the point of exchange. That coupled with previous experiences of people using work unpaid defined my terms. I figured the only people who would buck were those who didn't want to pay me properly anyway. Interestingly, I was seeing other service providers setting the same terms. I knew I had company.

I'm confident that this company would not give out it's products without getting a handful of change first so why should the terms be different on the other side of those coins?

So I let the client know that the attitude was not acceptable and that I set my terms of business and they were already accepted. Any changes would have to be negotiated on equal terms. I don't consider "Accept or we won't give you work" as equal terms.

I assume as of now I have lost a client. As someone else said to me, "What kind of client is this to talk to you in this way, as if they are King of the World? You set your terms and they have the right to not accept them but not to change them under you."

I acknowledge that part of the fault is mine. I never had this client sign my Terms - the existence and contents of my terms were clearly never in question. I had also allowed myself to be bullied into breaking my own terms in the first place as a job was seemingly urgent and the fellow with the purse strings wasn't around. I had effectively told the business that my terms weren't firm. I have rectified that now.

If I let people push me around then I will become a slave to them and we will both fail as today turns into tomorrow. As of today I have an opening for a good client who values a life lived.