#31 They want how much upfront? For what?!

January 28, 2018

Today’s post is in response to a request for information from a former colleague. Yes, she has found a way to get the answers without paying my day-rate.

 

With a shift in the F2F climate, this topic is becoming quite common in the Australian market. So, let’s dive in.

 

Pre-bills, aka upfront payments: When should a charity pay them, how much is reasonable, and how can both parties protect themselves in this arrangement?

 

Generally, in life, I will only pay upfront for a service or product that is guaranteed or have experiential evidence that it is very likely. For example, shelling-out for a flight home to see my family. The only reason for not making this commitment would be much more severe than making them. But is F2F different?

 

Let’s start with the background. A pre-bill or upfront payment is requested by F2F suppliers for a couple of reasons.

  • The agency is a start-up with little or no capital to sustain the first months of incorporation.

  • The agency is an existing entity that requires increased cash-flow whilst the campaign is in its infancy.

  • The agency is an existing entity that requires increased cash-flow because they are in dire financial straits.

As there are three reasons, we should investigate each one on its merits.

 

An encouraging trend seen in Australia is the willingness to partner with start-ups. If your organisation can risk inconsistent volumes, erratic quality and unpredictable service, the long-term benefits can be massive. Partnership early-on can result in a long-term loyal relationship.

 

If your organisation is in a position to take on this risk, you may find a small upfront investment is reasonable. As for exactly how much, well that’s hard to say. The highest I’ve seen is 30% of annual budget, but this may be a little steep if the agency has no collateral.

 

A start-up will be willing to sign most contracts as they just want to get off the ground, so write as many protections into your contract as possible but know that a small unstable supplier may have no way to repay the investment.

 

The second scenario where the experienced agency merely requires extra cash to limit the risks associated with the employment of more staff and extra resources is the safest one. The amount will vary on the need. Don’t accept a standard 10, 20, or 30% of annual budget, work with the agency to discover the actual cost of recruitment, training and a rough first couple of weeks.

 

Enshrine protections contractually. Insist on deadline for the full return of outstanding amounts after the written request to terminate and insist on repayment terms that suit your organisation during the campaign.

 

The final scenario is the most dangerous. Your potential supplier may not be forthcoming with the knowledge that they are in financial jeopardy, so you must investigate whether their request for assistance is based on lowering campaign commencement risk or attempting to avoid financial ruin.

 

I have no data that can tell you to back that horse (or unicorn) or run like the wind. This will depend on the agency and the circumstances. However, my gut says run.

 

In all cases, here are the bullet points to the surest ways to protect yourself:

  1. Agree an amount that your organisation can afford to lose but insist on either a very high discount on each invoice, or no payment of invoices until the debt is repaid. The latter is tough for a start-up as your agency are likely to run into the same financial issues whilst they are repaying the loan.

  2. Ensure contractual protections. Full repayment of any outstanding amount is required within a 30-day period of written request to terminate the contract. A start-up may have no resources to repay the amount owed so the pre-billed amount must be as low as you can go.

  3. Ask for the latest financial statement signed-off by a CPA from existing entities. If they are not forthcoming with these it may be that they are hiding a financial crisis from you. You can still invest in this agency, but it is a real risk and you need to push back very hard with this.

The most important lines in this entire blog are: Walk away from any contract you don’t agree with. The reasons your organisation use third-party agencies rather than an in-house team are a) You do not have the resources, and/or b) You do not want to carry the risk. Paying an upfront fee or pre-bill on donors is carrying the risk yourself, not passing it on to the supplier. Don’t get taken for a ride. If the amount is too high you may as well start your own in-house team.

 

 

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