Sending a supplier money can be scary. Did you choose the best partner? Will they really deliver what you asked them to? How do you know you can trust them? Unfortunately – and I wish I didn’t have to say this – some of this fear is warranted. As someone who helps product entrepreneurs find factories on a daily basis, I’ve seen my share of wasted investments and relationships gone awry.
What I’ve also noticed is that many “makers” make the same mistakes when it comes to paying suppliers. When doing a “post-mortem” on what went wrong, the brand and I almost always uncover one of the following three errors.
1) Lack of thorough vetting
Did you ask for referrals *and actually call* those referrals? Did you ask them the right questions? Did you look for reviews and any complaints with the Better Business Bureau? Did you confirm (through a client list or reviewing samples) that the factory actually has experience in your category? A recent client ordering slippers agreed to work with a supplier who said “no problem, we can make those” after reviewing the photo they provided. The client proceeded to send several thousand dollars for the development and sampling of these slippers, only to find out the factory has actually not made a similar style and was learning as they went (which translates into sub-par samples and a lot of wasted time).
Vetting can be quite a bit of work, especially if you are exploring multiple suppliers. It’s a great idea to make a checklist of to-do’s and questions for each potential so that you don’t miss anything.
2) Moving forward without a contract or clear list of deliverables
Things can obviously get messy if you haven’t spelled out exactly what will get done and by what date. This is equally helpful for the supplier as it is the client, because schedules are often delayed when brands take longer than anticipated to provide instructions and feedback. Adding contingency clauses (ex: If X is not completed by Y date, we will do Z), either in a formal contract or as part of the written communication between you and a supplier will help prevent disagreements.
Taking this step would have helped another recent client who spent $10,000 in design fees with a firm in order to have samples for an upcoming trade show (that they had paid a significant amount of money to attend). The factory was constantly behind the eight ball, resulting in the client missing the show and losing their entire booth payment.
If it’s so important, why doesn’t everyone have a formal contract? Because some suppliers don’t issue them and they can be expensive for brands to create with a lawyer. As a rule of thumb, I suggest investing in a contract if your purchase order is large enough that you would be unable to continue with your business if things go wrong.
3) Paying 100% up front
Don’t ever do this! There will be a few exceptions where things sometimes require full payment, such as a mold fee for a metal or plastic component of your product. These are unavoidable. But when it comes to services like product or garment development, sampling, and production, it’s best to pay a deposit to get started and then the balance once you’re satisfied with the final product. This will sometimes require visiting a factory in person since they may ask for the balance payment prior to releasing your goods.
Another way to structure relationships with service providers (like designers and engineers) is to pay for the work in stages, as it’s completed. This allows you to start small and essentially “test” a new partner before committing to the whole job, and they also protect their time and energy since they’re not doing work they haven’t been paid for.
When you pay for a service in full, you lose your most compelling negotiating tool – a refusal to send more money until the company corrects unsatisfactory work. You also lessen your financial exposure should they fail to deliver entirely, which happened to a wearables brand who hired an engineer to create some technical drawing for them. The engineer started the project, sent incomplete files, and then stopped responding to communications. While it’s a shame to lose a 30% deposit payment (as they did) it’s even worse to lose 100%.
Something important to note: payment terms will evolve as you develop long-term relationships with suppliers. When both you and your partner trust each other and have successfully completed projects together, it’s natural for both sides to be more flexible with their requests.
Is an upcoming payment making you nervous? A support package can help you cover your bases.