Today’s guest post is by Michael Dresner, CEO of Brand Squared, a Division of Peppercomm.

The RepMan blog from June 20th chronicled the financial wizardry of blue chip brand firms, who leverage their might and mandate 120, 150 or 180 day payment terms from their agencies.  Why do that?  To preserve cash flow?  To exercise customer power?  To ensure that only financially stable agencies are on the roster?  To manage the slow payment terms of your own customers? Or, is it simply to cover up the occasional dysfunction of corporate accounts payable?

I had a client last year that was 100 days past due on a sizeable invoice, whose answer was “none of us here really know how to get invoices paid.”  Right.

For all corporate purchasers that created this new SOP in agency management, congratulations on showing your might.  But here’s the problem.  It’s going to cost you.  Lest that sounds illogical, let me play this out.  Your purchasing team introduces the new payment terms that stretch into the distant future.  Your account leaders will say “whatever it takes.  We’re your partner.  We’re here to make this relationship work.”  And they will.  Because if clients keep their money for 4-6 months at a time, agencies (large and small) will borrow at a low interest rate to keep the lights on and staff paid.  No bank will worry too much about P&G or Mars not paying for work complete.  Let’s say their ongoing bank charges a few points (probably less).  The agency will simply bake that interest charge into the cost of service fees right back to you.  And shocking as this may seem, agencies will add a point for good measure.  Why not profit on this?  It’s a client directive.

For all clients reading this, please don’t think YOUR agency is the exception.  One of my professional colleagues is a CFO at a major holding company and lauded herself with accepting all major clients’ new payment terms.  I laughed and asked how much money her agency is now making off of interest.  She said “you don’t even want to know.”

So – who earns money from this new, client progressive model?  Agencies and their banks.  Who loses?  Clients.  Clients will pay higher fees.  They can argue the extra 5-6% now added to service fees, if they even notice.  Agencies will mention higher complexity in last year’s service offerings.  Name three marketing people on the client side who would even be willing to fight that.  I can’t think of one.

Clients lose on other levels too:  incumbent agencies WILL invest resources in making themselves financially whole – time, energy, labor hours – and those resources will inevitably come from a finite pool attributed to said client.  If I were on the client side, I would want the agency spending those resources on how to grow my brand.  Clients will also lose out on small agencies that spun off from the large holding companies, the small agencies with the most creative ideas, with the most innovative thinking and eliminated bureaucracy, which cannot operate on six month payment cycles because they’re new companies.   Those smaller agencies won’t go out of business. They will simply eschew the Fortune 500 and find more collaborative clients.  And ultimately, those smaller agencies will represent the larger truth that small business has and will always be the engine that drives industrial and economic growth.

So – for all of those purchasing managers insisting on 4-6 month terms – ask around.  Get an unofficial view from an agency friend.  See how easy it is for a vendor to borrow money at low rates in lieu of paid invoices and make you pay that interest in some fashion.  See if your new mantra precludes marketers from using independent shops with hard-working, inventive experts in their field, who swallow their pride and work with an easier customer base.   Are you really winning by holding onto the check owed for services already rendered?

Good luck with that.