MIND YOUR BUSINESS / Having big order may demand big changes in your processing
Q: I own an e-commerce site where the typical order is $50 to $250 from individual customers, who pay by credit card. However, a corporation recently approached me about an order that could be over $100,000. How should I handle payment for such a large order? Should I ask for half the money up front and half on delivery? Will they pay by credit card? How do I protect myself against delays in payment?
Elated but ignorant
A: Toto, we’re not in Kansas anymore. This $100,000 commercial order puts you — if not over the rainbow — in a new part of the business world with different rules than your familiar $50 individual transactions.
For starters, this corporate customer is unlikely to pay by credit card. That’s good for you, because credit card processing fees of 2 to 3 percent would cost you $2,000 to $3,000 on an order of this size.
Instead, large companies typically issue a purchase order and pay by check. They also typically seek terms such as net 30 or 60 — meaning they would pay you 30 or 60 days after they receive the goods and are billed.
That’s great for their cash flow. It’s not great for yours.
“Large companies have learned to be very good about being slow to pay,” said Leonard Sklar, a collections expert and author of “The Check is NOT in the Mail.” “Their controllers are good at putting those payment policies in place.”
You should still try for more favorable payment terms. It can’t hurt to ask for full payment in advance, or half up front and half upon delivery of your products, especially if you incur production costs in getting the goods together for this customer.
Some companies may sympathize if you explain your cash flow constraints as a small business.
“Your starting position could be payment in full in advance and then negotiate downward from there,” Sklar said.
How to ensure that this mega-customer doesn’t stiff you entirely? If it’s a familiar name like IBM or Intel, you probably don’t have to worry. If it’s a firm you’ve never heard of, you can purchase a credit report on them from a company like Dun & Bradstreet («www.dnb.com») or Equifax (links.sfgate.com/ZLC)
You can also ask them to provide references from other vendors.
“It becomes the same as giving someone credit, where you ask for references,” said Jerry Ervin of Paragon Strategies, a San Francisco sales and management training company with small as well as large business clients.
Be sure to get their order in writing, either through a purchase order or a letter of agreement that spells out what they are buying and when they will pay for it.
Then you’ll need to send them invoices when their payment is due, and on a regular basis afterward.
You can find boilerplate sales agreements and invoice forms at a variety of Web sites, including links.sfgate.com/ZLD (for free) and «www.allbusiness.com» (for a small fee).
This big order is a great opportunity for your business. Just make sure your suppliers can handle the volume and you can handle the cash-flow issues.
If the deal won’t work for you, don’t be afraid to turn it down.
“Eighty percent of our clients pay up front, but the bigger companies pay 30 or 60 days out,” said Ervin. “We recently were dealing with IBM, who insisted on paying 90 days out. There was no way of getting around that with them.
“So my choice was, do I want to work with IBM and get the name recognition that brings me? The trade-off was getting paid 90 days out. I did it with them, but other clients I wouldn’t do that with.”
Want more information on sales contracts and invoices? See Nolo Press’ Web site at links.sfgate.com/ZLE or AllBusiness at links.sfgate.com/ZLF
Q:We recently converted our real estate rental business from a sole proprietorship to a limited liability company. We are recording our properties in the name of the LLC and also changing our insurance policies into the name of the LLC. Are there other steps we should be taking?
Wondering in Wine Country
A:If you have mortgages on any of these rental properties, I hope you’ve talked with the lenders. Most mortgages require the lender to approve any title transfers, including transferring the property into an LLC.
And — here’s where you may have gotten yourself into trouble — many lenders won’t want to be involved with an LLC that holds multiple properties.
“Lenders often want an LLC to be set up a certain way — as a single-purpose entity where the LLC holds only one property,” said Felicia Vallera, a San Francisco attorney who specializes in small business. “We typically set up a series of LLCs (for rental properties) rather than one.”
The reason for creating a separate LLC for each property is to insulate each one from potential legal judgments against the others. Suppose someone slips and falls in one of your rental homes and wins a $1 million court judgment. If that judgment is greater than your equity in the home, it could be attached to other properties within the LLC. Neither you nor your lenders want that to happen.
So check your loan documents. Talk to your lenders. Consider setting up a separate LLC for each property.
There are also some other steps that people forming an LLC should routinely take, to ensure that it holds up in court:
– Adopt a written operating agreement for the LLC.
“Gaining the protection that an LLC affords is a two-step process,” said Robert Buchanan, a San Francisco small-business attorney. “It’s not just filing the papers. The second step is adoption of an operating agreement.”
– Transfer all your business assets into the LLC. That includes things like furniture, fixtures, the name of the business, forms and manuals, and inventory or (in your case) your real estate holdings.
– Get an employer identification number for the LLC from the Internal Revenue Service. As a sole proprietor, you may have been using your Social Security number for tax records of this business. No more — you’ll need a separate number.
– Make sure your bank account, phone bills, vehicle title and any other business-related records are in the name of the LLC. “Everything associated with the business needs to be in the name of the LLC,” Buchanan said.
The bottom line? To make sure you’re doing this right and not creating problems for yourself down the line, talk to an attorney.
More on business coaches: Last week’s column item about hiring a business coach sparked suggestions from several readers. Leanne Hoagland-Smith, an Indianapolis business coach, offers some excellent tips on choosing a coach at links.sfgate.com/ZLH. Another helpful article on choosing a coach can be found at links.sfgate.com/ZLI.
Meanwhile, Oakland business coach Sylvia Warren suggests clarifying your personal goals before choosing a coach: Some questions to ask yourself are at links.sfgate.com/ZLG.
