Should my MSP offer Credit Terms on Hardware and Software?
One of the benefits of offering Managed Services is that typically you can charge your client in advance for the service, and usually by automated payment.
As such, you’re not relying on a client to process and manually pay your invoice - you are receiving payments quickly, efficiently and in advance. As a result, your companies cash-flow situation will improve overnight.
But most Managed Service Providers (MSP’s) also do a good chunk of project based work for clients, those projects often involving the provision of Hardware and Software licenses to a client.
To gauge how MSP’s dealt with billing for these projects, I spoke to three different Managed Service Providers to get an overview of how they work with clients when delivering Hardware and Software expenses.
The Small MSP
The first MSP, a 2-man shop with a turnover of $160k, offered 30-day credit terms to clients on all projects, including the provision of hardware and software.
When I asked whether this strategy had an effect on cash-flow, the MSP owner was quite open with me. “I have often gone without paying myself a wage while I wait for a client to pay me for the upfront costs I’ve incurred on their behalf, as we don’t have enough money within the business”.
What about clients who don’t pay on the agreed terms? “I’ve lost sleep and felt physically ill at the thought of not getting paid for work we’ve done and services we’ve provided. We’re a small company, so it’d just take one client to not pay on time to have a significant effect on us”.
With that in mind, why does the MSP continue to offer credit terms? “We feel like we have to offer credit terms as they are expected by clients. If we didn’t, we think we might lose the business”.
The Medium MSP
The next MSP I spoke to was a ten man firm, a $750mn turnover with more than 30% of revenue derived from Project work, Hardware and Software Sales.
They requested a 50% deposit from clients on all hardware and software purchases, with another 25% due within 7 days of delivery of equipment.
Why did they take this strategy? “We quickly learned that if we offered 100% credit terms on hardware and software purchases, while we had to pay our suppliers in a timely fashion, our clients didn’t take the same view towards our bill.”
I asked the owner what caused him to change his attitude? “I remember when a larger client of ours stopped returning our phone calls and e-mails at the end of a big project, with money still outstanding. We were owed $75k for hardware purchases alone, and it was a scary time considering what would happen if the client didn’t pay. Eventually, the client paid - but I’ll never forget the way it made me feel. There were plenty of sleepless nights, I can tell you”.
The Large MSP
The final MSP I spoke with was a $3.75m business with 40 members of staff. Their terms offered strict credit limits to clients based on purchasing history, starting at a $1500 credit limit with 100% up-front payment from clients for any hardware and software license purchases above this amount.
I asked the owner why they treated credit terms so strictly? “We aren’t a bank, and we aren’t here to lend people money. We are an IT Services company that, as a courtesy to clients, will specify and order Hardware and Software for them.”
Have any clients objected to this stance? “Yes, we’ve had clients who have said they’d take their business elsewhere because we don’t offer credit terms. We’ve politely but firmly confirmed our policy wouldn’t change.”
Have they ever lost business as a result of this policy? “We had one client who insisted on credit terms and wouldn’t proceed with the project until we had resolved this. So we introduced him to our supplier directly - who in term refused to offer him credit terms. We then introduced him to another supplier, who wanted payment up front. Two weeks later, the client returned to us and paid up front for the hardware.”
Based on the conversations I’ve had with MSP’s, it seems the smaller shops make assumptions over what their clients will and won’t accept in terms of credit. The larger the companies become, the less fear they seem to have over losing business, and the more sensible they are about taking on risk.
Whatever the size of your business, take a look at your finances and before you undertake your next project, ask the question “If the client didn’t pay us for this equipment, but I still had to pay the supplier - what effect would it have on my business?”.
Chances are, you wouldn’t or simply couldn’t afford to take that risk.
That being the case, if you’re not insisting upon up-front payments from your clients for hardware and software - why are you risking your business in this way?
As the former owner of an award winning IT Managed Service Provider, Richard Tubb works with MSPs to help them increase sales, take on employees and build up relationships with key industry contacts. You don't have to do it alone any more - contact Richard and have a chat about your needs and how he can help you.
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