New Media Requires Tougher Credit Checks

Interactive advertising is the real bright spot in media companies’ non-traditional revenue now. However, these buys can also involve more players than the traditional transactions that used to be our bread and butter. That means media companies must do their credit homework before approving credit for today’s multiplatform media buys.

This is the advice provided by Gregory Frost, manager of credit and collections for LIN Media in an article appearing in the March-April issue of MFM’s The Financial Manager.   

 As Frost notes, many media companies have been blessed with double-digit increases in revenue from their digital platforms in recent years. This trend necessitates an enlarged “to do” list for credit managers, whose job is to ensure this non-traditional revenue (NTR) is collected.

One of the first challenges for credit managers is that these digital media buys are often made by new agencies dedicated to non-traditional media. Finding sufficient credit information about these new companies involves some extra steps for credit managers. Frost has also seen many instances where additional agencies involved in an NTR buy weren’t initially disclosed by the agency working with the station’s sales team.

Frost, who is a member of the leadership committee for MFM’s BCCA subsidiary, and who was honored with our BCCA Member Contributor award last year, has become one of our experts on NTR credit analysis. He has identified three key areas that need to be addressed before making a credit decision for these advertisers: contract agreements, financial responsibility and credit and financial data.

Contract agreements

With the likelihood that more than one agency will be involved in an NTR media buy, there’s a good chance more than one agency will also be involved in the payment process. This means that more than one agency will need to be part of the credit review. Frost recommends, if at all possible, you obtain a copy of the agency’s contract with the advertiser, which would most likely clarify the payment process.

He also suggests asking your legal department to review the contract. He notes that, “Many contracts include terms in the fine print that your sales teams either will not understand or simply fail to review.”

Of course, many agencies may be reluctant to provide a copy of their contract with the advertiser. When this happens, Frost says it’s important to obtain the name, address and phone numbers of all parties involved in the buy. In fact, the primary agency will typically have a “credit and financial info” sheet on the companies that contains this information; a sheet which they can provide to you.

Financial Responsibility

As Frost points out, determining credit risk isn’t the only responsibility of the credit manager. These individuals in your company are also charged with collecting those revenues. This means that your credit managers must help to determine when payment is expected as well as which party is responsible for making the payment.

This becomes very important in the case of non-traditional media transactions, where it’s not uncommon for money to change hands three or four times before your company is paid. Frost says these situations point to the need for a signed payment liability document that defines who is responsible for payment to your company and when.

As we have discussed in earlier columns, there are a number of scenarios for liability responsibility.They include sequential liability, where the seller can only hold one company responsible for payment at a time. In these agreements, each party is released from liability once they pay the next party in line. This makes it essential for your credit managers to conduct a credit review of every company in the payment chain. 

While many advertising agencies prefer this scenario, it puts a tremendous burden on the stations’ credit application and collections processes. This is why MFM has long supported a “joint and several” liability policy. In this situation, all parties involved in the buy, including the advertiser and the advertising agency, are responsible for payment until your company is actually paid. This form of liability improves your ability to collect the payment, especially if one of the parties seeks bankruptcy protection.

Frost also describes two other scenarios, Sole Liability: Agency and Sole Liability: Advertiser, which limit the number of parties who must become involved in the credit application process. In the case of Sole Liability: Agency, the agency that places the buy with your station is responsible for payment whether or not it gets paid by the other parties to the buy. This makes it easier on the media provider, but it is still important to know as much as you can about both the advertiser and the agency making the buy. There’s nothing wrong with asking the agency to share the results of its credit review of the advertiser. 

Since most media buys are placed by an agency, the Sole Liability: Advertiser scenario adds to the sleuthing your credit managers will have to conduct and can be confusing to the advertiser. Frost recommends modifying your standard payment liability document by adding language such as “Advertiser guarantees payment to [media company name here] until [the media company] is paid either by the advertiser or agency. Payment from advertiser to agency does not constitute payment to [the media company].” This modified document should be signed by the advertiser.