Custom harvesters today can relate to David Eisentraut’s troubles collecting on bills back in 2003, when the Wisconsin dairy industry was going through a prolonged and severe downturn.
“Milk prices were bad and cash flow on a lot of dairies was out-and-out terrible,” says Eisentraut, of Eisentraut Ag Services in Waldo. “We were spending a lot of time and energy chasing after payments from some of our customers. It was pretty frustrating.”
So Eisentraut borrowed a concept widely used in the home construction business. He asked customers to consider setting up escrow accounts specifically to pay for his custom harvesting and other ag-related services.
“Looking back, it was one of the best business moves we ever made,” he says.
With an escrow account, a customer puts money to pay his custom operator into an account at a local financial institution before any work starts. The money stays in the account until a specified date (usually when work has been completed). Before the custom operator or customer can access the account, both must sign off on it.
“It simplifies things and cuts down on our paperwork and clerical costs,” says Eisentraut. About a half-dozen of his customers now pay bills that way. “We don’t have to send out invoices every month or calculate and recalculate interest costs on outstanding balances. And since we’re saving on our costs, we’re able to offer discounts to the customers who work with us on this kind of account.”
Some lenders also pay interest on escrow accounts. “With the discounts we offer and the interest paid by the bank, the return on investment for these customers can be as high as 10-15%,” he says.
Eisentraut also uses the concept to screen potential customers.
“We’re upfront with people in explaining how it all works. If they seem uneasy about putting money into this kind of account, we think of it as a red flag that they might be having some financial problems. We have to ask ourselves if we really want to do business with them. It’s not the only factor we consider, of course.”
An escrow account can head off problems that can develop when accounts receivable become overdue, agrees University of Wisconsin ag law specialist Phil Harris.
“Whenever you’re negotiating payment terms with customers, one of your goals should be to minimize the amount of money that they’ll likely owe you at any one time,” he says. “That way, if a problem develops and they don’t pay you, you won’t be walking away from as much money. An escrow account addresses that. The money is paid up front – into the account – before the work gets done.”
Escrow accounts offer at least one important advantage over contract clauses calling for customers to provide security interests, Harris adds.
“The beauty of the escrow account is that the money is earmarked specifically to pay you for the services you’re providing. It’s money that can’t be taken by a lender or other creditors if the customer is having trouble meeting their other financial obligations.
“A security interest just gets you a place in line with other creditors if the customer is in extreme financial difficulty,” he says. “You still have to go through a number of procedural steps to get paid. An escrow account is quicker and easier.”
Customers reap additional benefits, too. “For example, if the work isn’t performed for some reason, the money in the account reverts back to the customer,” Harris says.
But don’t expect all customers or potential customers to be interested in the concept, he adds. “Some simply won’t have the money to put into the account up front.”