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The classic vendor who practices this advance payment scam are
the photo-copier service firms. They usually ask for an
advance payment for up to twelve months in advance, through a
service contract. Let's think about this for a minute. How
many of you have been able to collect a salary for twelve
months into the future? And, how many other types of service
businesses ask for advance payment? Do you receive rent,
leases, labor payments with that kind of lead time? Of course
not!
You should bring into the advance payment discussions the
following thoughts:
1. What guarantee do you have that the
firm will not fold up in bankruptcy or get tied up in Chapter
11? Before you hand over your hard-to-recover funds, ask them
for a financial statement. After all, the cost in both time
and currency, to litigate for the return of funds, is
excessive. 2. Will the firm discount your advance payment,
giving you market rate interest on your loan to them? After
you have completed your negotiations, insist upon a cash
discount, equal to the prime rate. Most comptroller types are
aware of the future value of a present-value dollar. 3. Why
do they insist upon an advance payment? Is there a question
concerning your credit? 4. If, within the limits of your
service contract, you were to terminate, will they return all
of your prepaid funds on a pro-rated basis? As a result of
performing consulting work, for both a photo-copier service
firm and a time clock/paper shredder service firm, I learned
that the advance fee is almost pure gravy. The true cost of
business is substantially less than stated. Principals of both
firms told me that almost 70% of the prepaid revenue goes
directly to the bottom line. As a purchaser of service from
Xerox, I stumbled unto a clause they called "mitigated
damages." What that means is they want to collect up to six
months of service fees, for work they will never perform, just
because you had the nerve to do without their repair people.
In my case, they insisted upon the mitigated damages fee, even
though some of our machines were sold and/or packed away in
storage.
There is no sound business reason for insisting upon advance
payment. They simply ask for advance payment and people have
gotten into the habit of paying it. These vendors attempt to
sell you the idea that you will be saving money by the
reduction in transaction costs, caused by handling fewer
invoices. Assuming you decide to prepay service, insist upon
monthly payments instead of six or twelve-month, lump sums.
When you consider the number of vendors you pay per month, the
extra piece of paper is irrelevant. In most instances, you
need merely write a blanket purchase order, indicating the
agreed upon annual terms, payable on a monthly basis, and
instruct Accounts Payables to write a check each month. No big
deal. RESULTS: By paying for services rendered, or up to
thirty days before, your firm will be recovering the
opportunity cost of funds, or about six percent, per year.
On the grey side of the ledger, you will be reducing your
firm's risk of losing funds. You will also have leverage for
poor performance, as you can always withhold payment until
problems are resolved. Vendors take notice at the highest
levels when their income stream is blocked.
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