The promise of the new year lies ahead. One way to help ensure that it will be a profitable one is to re-evaluate your company’s pricing strategy. We recommend devising an approach that...Read more »
Suppliers and Customers as Financing Sources
Let’s face it, getting financing is not easy these days, especially for small and mid-sized businesses. Banks are extra cautious and many business are too small (or not in a sexy enough industry) to be on the radar screen of venture capital or private equity funds.
That leads small business owners to the “friends and family” round of financing, which has its limits unless you happen to be related to Bill Gates or Warren Buffet. Most of us are not.
I’d like to discuss potential sources of financing that you may not have thought of – your suppliers and customers. “Wait a minute,” you say, “I am delaying payments to my suppliers as long as I can without getting cut off!” Or, “I offer my customers a discount for prompt payment!”
Both strategies work, but I am talking about something deeper. The concept depends greatly on the situation, so it won’t work in all cases. It is also harder to pull off if your trading partners are large bureaucracies and you may have a hard time getting to the appropriate decision maker.
Why do I think these are avenues worth pursuing? First, if you don’t try, your chance of success is zero. Second, your trading partners are operating in the same economy as you are, but they each have their own financial profile.
Your suppliers, like most companies, have lost business over the last few years. The last thing they can afford is further revenue loss. Sure, you can stretch out your payments to them, creating tension and destroying goodwill. But what if you had a strategic discussion with the highest level person you can get to (not their Accounts Receivable manager!)? Chances are that you are an important customer to them. Talk about arranging extended terms with an offer to compensate them for waiting for their money. (You would pay a bank interest if you could get a loan, right?) Try to line up your payment terms with your incoming cash flow.
On the customer side, we know from the media that some companies are sitting on piles of cash because they are nervous about investing it back into their business in this uncertain economy. Maybe some of your customers fall into this category. Chances are you are an important supplier to them, maybe because you provide a critical component or you are one of several vendors they use to keep pricing competitive. In any case, again at the highest level possible, have a strategic conversation about how you could provide them better pricing if they paid cash with order or cash on delivery. Again, to you, the discount provided is the equivalent of interest paid to a bank. To your customer it may be his or her best alternative use for excess cash, rather than investing it in bank CD’s at less than ½%.
As mentioned above, these concepts will not work in all cases, and you will need to run the numbers to make sure that they make economic sense. But they certainly are worth a try.
Please feel free to contact Doug Jones, Director at Fahrenheit Finance, at firstname.lastname@example.org on any accounting or finance issues related to your small- or middle-market business.