Recently, one of my clients was offered a $1-million (U.S.) investment for his business from an unlikely investor: the manufacturer he hired to make the product.
Having a supplier help finance a business might, to many, seem like an unusual option. After all, aren’t suppliers busy trying to sell you their products and services? And aren’t your receivables already a risk to them; why, you might ask, would they want to increase their exposure?
I’ve been brokering supplier-financing deals of all sizes for more than a decade. For many businesses, it’s a worthy, but often-overlooked, option.
There are some common themes for when, and for who, supplier financing works.
For the supplier, one big reason to help with your financing would be to ensure your loyalty.
While you should never enter into an agreement that causes you to become “stuck” with a supplier, it can be a good move in the short term to get a vendor to make an investment in exchange for awarding a contract for a certain number of units or a certain time period.
As well, if vendors have developed a long-term relationship with you through previous transactions, or you are being represented by a consultant or other partner in whom they trust, they may simply see a great opportunity to make money along with you.
Furthermore, suppliers willing to make an investment in your business may see their risk mitigated by the profit they will make by selling you their services or products. Instead of just investing in a business, they are investing in a business that will turn around and do profitable business with them.
And why might supplier financing be a good move for you?
Many businesses find traditional sources of financing difficult to acquire, especially if the business, product or service is new. Since cash is king in any small business, you might find your supplier a more willing financing partner than a bank or venture capital firm.
You can sell a supplier shares just as you would any investor, knowing the supplier will be “extra committed” to providing you with a quality product or service that is of value to your business.
Your supplier can forward a loan with fixed or flexible repayment terms and rates.
There are other ways that suppliers can help finance your business beyond handing you money.
A supplier may give you extended terms, like 60, 90 or 120 days in exchange for a guaranteed commitment or slightly higher price.
If your vendor needs to invest in tooling or equipment in order to supply you, he or she may do so at his or her own expense , rather than asking you to pay for it, as is often the case.
Your supplier may carry inventory for you so that you can purchase “just in time,” which lowers your inventory cost and increases your flexibility.
A supplier may lower the typical minimum order quantity or set-up fees on production runs, again, making your purchasing more flexible.
Your supplier might buy a year’s worth of the raw materials it uses to make your products in order to “lock in the price” and, at least temporarily, lower your exposure to pricing fluctuations.
Your vendor may agree to accept payment in your home currency as opposed to his or her own, transferring currency risk from you to them.
All but the first example allow you to access a form of financing that can be highly beneficial to your business, without sacrificing equity.
So, the next time you sit down with any of your key suppliers, keep in mind that you might want to negotiate more than just the price, and the supplier may have more of an interest in your business than just selling you products or services.
Think outside the box and you may be surprised that win-win situations can be found in the most unusual and creative business transactions.
Special to The Globe and Mail
Chris Griffiths is the Toronto-based director of fine tune consulting, a boutique management consulting practice. Over the past 20 years, he has started or acquired and exited seven businesses.
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