Five Pitfalls to Avoid in Managing Partner Payments

Here’s something that is not going to blow your mind. 

A Harvard Business Review survey of more than 600 business and technology leaders across the globe some years back helped cement the correlation between early adoption of new technologies and better business outcomes.

We mean... right? Seems like quite the no-brainer not necessitating mindshare at Harvard, but sorry, we digress...

Changes within the modern enterprise that have maintained the relevance of this theory include a more mobile- and tech-savvy customer base. More people today expect immediate access to information and transaction processing ability, no matter the location. Successful organizations remain the ones easily able to cater to these expectations.

It’s the same for business-to-business partner relationships. 

Organizations able to successfully incorporate new technologies will find more positive outcomes in their entrepreneurial partnership network.  

Now, whether technology-forward or not, when it comes to the compensation portion of the partner relationship, there are some things to keep in mind.

Let’s call this the FiPittOfParPay. 

No? 

OK, herewith, the Five Pitfalls of Partner Payments:

     1.  Beware of high processing costs

According to a semi-recent Deloitte survey, the exorbitant fees associated with traditional payment methods (paper check, etc.) were a major headache for more than a third of the middle market companies that responded. And, more than half of the costs associated with those more traditional payments were staffing-related.

    2.   Resolve payment method mismatches 

Often, payment decisions are heavily dependent on the chosen method of payment. A mismatch in preferred payment methods between partners should be resolved early on in the relationship. Otherwise, that old adage involving a mountain and a molehill could come into play. 

Or things could be over before they begin.

Don’t lose potential business to your competitors by overlooking different payment options which could be specifically attractive to the partner in question, whether regional, national or global. Explore multiple payment methods and find which suits all parties best.

    3.  Consider everything before committing to guaranteed payments to your partners 

When guaranteeing payments to partners, applied to ensure a particular amount is provided for specific services or use of capital, the typical reason is to ensure first-priority distribution even though a net loss is created for the partnership.

An article in the CPA Journal noted that despite the concept’s simplicity - and the fact neither the IRS or the courts can agree on the definition, “these payments can result in unexpected difficulties for both the receiving partner and the other partners if they are not planned properly.”

While guaranteed payments may be ordinary income for the partner, for the partnership such payments are deductible or capitalized, depending on the tax code section - and associated rules - applied. In this regard, the problems associated with guaranteed payments can be both definitional and operational. Timing considerations as well as payments to retired partners also must be factored.

   4.  Know the disguised sales rules

Given the opaque nature of definitions in the area of guaranteed payments, Congress enacted a separate section of the tax code known as the “disguised sales rules” for specific scenarios. In instances covered by this code, there’s a transfer of either money or other property, directly or indirectly, by a partner to a partnership followed by another transfer - again, either money or other property - by the partnership back to the partner. Viewed together, such transactions are correctly deemed a sale or property exchange to be treated as between a partnership and partner not acting in that capacity, or between partners acting outside of the partnership domain.

   5.  Cumbersome remittance data processing

There are a number of ways the process of reconciling multiple invoices and receiving and processing remittance data could easily go sideways. Small headaches, often overlooked, which could cause bigger problems include the use of files with missing data elements and/or incompatible file formats. Also, trying to automate remittances without much back-office support could pose problems.

The business-to-business payments processing needs have traditionally been underserved within a thriving middle market. This segment of the U.S. economy, made up of businesses with revenue from $50 million to $1 billion, has continued to grow at a fast pace to the tune of more than $6 trillion in revenue, according to Deloitte.

Recognizing and addressing the potential hurdles here will help pave the way for a smooth and successful partner payment management process.

And, like the folks at Harvard so wisely noted, applying the proper use of available technology within this relationship, as in other aspects of your business, sure couldn’t hurt.

Contact us today to learn how RecVue’s solutions helped an icon of the car rental industry, global car rental leader Hertz, integrate its billing and partner payment processes across 43K franchise offices, in total handling over 4.5M rental agreements each month.