We recently had a client who was excited to share with us his great news—he had just received his first purchase order from Walmart. For an entrepreneur, getting a PO from Walmart is like winning the entrepreneurship Super Bowl. That single document was all the vindication he needed, proving that his hard work and long hours had finally paid off. Now, his thinking went, the world would finally see—and ultimately fall in love with—his brand.
Our client was over the moon. There was only one small problem: In all his excitement about this huge achievement, he had signed an agreement that contained some very unfavourable terms for his company, and significantly limited his ability to finance his Walmart invoices and purchase orders.
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It would be naÃ¯ve to think that our client—an entrepreneur who did not yet have any traction with his product and had never sold anything to any retailer before—could force Walmart to bow to his every demand. But by understanding some of the key levers that may be adjusted in the agreement prior to entering into negotiations with Walmart, perhaps he could have changed some details that would have made it easier to finance or factor his invoices, and which may not have been important to Walmart.
Having reviewed many Walmart and other big box retailer supplier agreements, here are five issues you should understand prior to signing a vendor/supplier agreement:
1. Type of sale
If the agreement says anything other than “true sale,” the risk of sell-through is borne by you, the supplier. “Guaranteed sale” means that unless the product sells within an acceptable time period, Walmart can send it back to you or demand significant discounts or credits—they are taking the product on consignment, and you are guaranteeing that it will sell. A “true sale” means that Walmart is purchasing the product from you and is obligated to pay you whether they sell it or not; the risk of sale is transferred to Walmart as soon as they accept delivery. Typically, factoring companies will only fund invoices that are true sale (although at FundThrough we can also fund guaranteed sales).
Invoices that are outstanding for 90 days or more are difficult for factoring companies to fund, and banks won’t include those invoices in their margin calculation. In Canada the average term provided to customers is approximately 60 days. It’s also important to understand when the payment term begins. Walmart, for instance, has an EOM option in their vendor agreement. EOM—End of Month—means that if you deliver past a certain date (usually the 24th of the month), Walmart will acknowledge the invoice as being received in the next month, which means if you agreed to 30 day EOM terms, you really have 3637 day terms.
Since cash flow is critical for small business owners, many companies opt to include early payment discounts in their vendor agreement. Walmart’s standard early payment terms are 2%/35/65. This means that Walmart will have the option to take a two percent discount and pay you in 35 days, or if it opts not to exercise the early payment option, the company will pay in 65 days. The two percent is deducted off the gross invoice amount before all other deductions (a typical Walmart invoice might have 10% worth of other discounts). This means the cost to you to get paid 30 days earlier by Walmart is 2.2%, or 26.7% per year! You can go to a third party funding source and pay a lot less—the cost of funding a Walmart invoice through FundThrough is typically 0.033% per day, or 12.0% per year.
In addition to early payment discounts, Walmart typically has a table in their vendor agreement that includes all other deductions and discounts. Some of these are on-invoice (they are directly deducted from the gross invoice amount to be paid to you) and some are off-invoice (a monthly or quarterly charge). These deductions, which can add up to 10% of the gross invoice amount, include promotional allowances (slotting fees), warranty fees, co-op/marketing fees and defect fees. If you are looking to factor your invoice, the factoring company will deduct all the discounts to determine available funds.
4. Shipping and delivery
The shipping terms determine when you are able to invoice your customer and start the clock on the agreed terms. Shipping terms also determine when your liability ends and the goods become the property and responsibility of your customer. Standard terms include: Freight on Board (FOB) port, meaning the customer takes ownership of the goods on the dock in the country the goods are manufactured, and is responsible for arranging and paying shipping; FOB vendor’s warehouse, meaning you are responsible for bringing the goods in from port and delivering them to your warehouse, where your customer’s truck will pick them up; and FOB customer’s dock, which means you are responsible for delivering the goods directly to your customer’s warehouse.
Make sure you read the delivery terms carefully in the vendor contract. There are often penalties for missing delivery windows, taking longer than anticipated to unload, or not delivering the goods in the precise manner expected.
5. Remittance Details
Upon setting up an account with a customer and receiving a vendor number, you will be asked to submit remittance details (where payment should be made) and form of payment (cheque or direct deposit/EFT). If you are planning on factoring your invoices or using a third-party asset-based lender, you will likely need to change your remittance details to a bank account controlled by the factor or asset-based lender. Implementing this change occasionally takes time to work its way through the customer’s organization, and may be easiest if done up front when you first sign an agreement with the company.
Steven Uster is the founder of FundThrough, a marketplace lender that provides secured lines of credit for growing companies. He is also the founder of Zillidy, a personal asset lender that lends against precious metals, diamonds, jewelry, watches and other luxury assets as collateral.
Have you ever had to negotiate a purchasing order with a major retailer? Share your experiences using the comments section below.