Supplier or Vendor Financing
by Tiffany Wright
Traditionally, supplier financing involves stretching out payables from “paid-upon–receipt” or “net 30” days to 60 to 90 days. Some businesses may refrain from sending timely payments to those suppliers or other vendors who don’t call or send frequent reminders or assess interest penalties for nonpayment. (An example of the squeaky wheel gets the grease.) Typically, however, unless agreed upon in advance, suppliers tend to balk when the terms are extended past 30 days. If your supplier is also a small business, your slow payments could cause cash flow problems and thus, financial difficulty for the supplier, especially if you are a major customer of that supplier.
If the supplier is relatively large and has good credit, you can often obtain extended payment terms. The best time to have this discussion is in advance of the purchase or shortly after the purchase but long before payment is due when buying on a regular schedule. If you have been unable to obtain a bank loan, other loan, or other financing, supplier financing can help. If suppliers or other vendors comprise the bulk of your payables, then supplier financing may be just what you need to access liquid working capital for your business.
If you have been a good customer or have the likelihood of becoming a larger customer, the supplier may even be willing to provide you with a short or medium term loan secured by the inventory or equipment the supplier provides you. The best way to make this happen is to appeal to the supplier’s business sense and stress the highly positive impact your growth will have on the supplier. I.e., If you are a painting contractor and you purchase a minimum of $10,000 in paint a month, stress how you contribute $120,000 in revenue to the paint store’s annual. State how the only thing holding you back is your ability to fund purchases when your company gets paid ~60 days after work is completed. If you could finance the $10,000 per month purchase, you could potentially grow the business to require paint purchases of $12,000 - $15,000 per month, an increase of 20-50% from you.
Note how the painting contractor’s working capital is affected if he is able to pay for the paint AFTER he receives payment for the completed job. Instead of having to come up with $20,000 in cash in ADVANCE to cover paint over the two month period until he’s paid, he’s able to keep that cash in his bank account. Bonding entities like to see higher liquidity. General contractors also look at liquid working capital when subcontractors apply for their respective preferred vendor programs. Finally, this relationship helps build business credit. If the supplier does not report to Dun and Bradstreet, request a Letter of Payment History from the supplier and submit it to Dun and Bradstreet to add to your business’ credit file.
You may also induce your key supplier to provide you with a term loan of one to three years to finance the purchase of another business or its assets, working capital, or expansion capital if you are growing quickly. To secure longer terms, offer to make the supplier the sole or majority supplier of that product for a designated period of time, at least the length of the loan requested. The supplier knows the security for the loan – your inventory or supplies, his products – well and, therefore, will value the inventory much higher than a bank. (Unless a third party appraisal is performed that provides different numbers, banks generally value inventory at 50%. Suppliers may loan up to 95% of the inventory’s value.)
One caveat: Large national firms often lack the flexibility to negotiate. However, sometimes these large companies contract or sub-contract with smaller firms who do have flexibility. If this applies to your supplier or vendor, find the contractor and negotiate directly with him or her by offering to re-route your business with the large firm through the contractor.
If you believe you can obtain a loan for a larger amount from the vendor than that secured wholly by inventory or supplies, by all means pursue it. In that case, you may not even wish to pursue a bank loan as you may be able to negotiate more flexible terms and interest rates with your supplier than your bank. You may need to offer additional collateral such as a mortgage on the other business assets and a personal guarantee. Since such a loan would likely supplant a bank loan, the collateral would appear more like that required by banks. Negotiate the terms yourself if you are knowledgeable. Otherwise, use your CFO or accountant and your attorney to finalize the terms.
In summary :
Use supplier or vendor financing when your business relies (or could rely) heavily on one to three vendors or suppliers to provide a substantial amount of goods thus creating a significant, measurable revenue and profit impact on the supplier(s) from your business. If your supplier will benefit tremendously from your expansion, i.e., her sales and/or profit will increase in direct proportion to your increase in sales, approach your supplier for a loan. When your supplier is small enough that you can negotiate directly with the owner, president, or general manager of the firm, do so. At the very least, request extended payment terms. Even larger firms often extend longer terms to their better customers – however, usually only when explicitly asked.
Who to approach?
Unlike retail outlets or distribution companies, most construction-related firms do not hold much in salable inventory. Specialty contractors do stock supplies to deliver services: painting contractors keep paint; concrete specialists have concrete or cement; drywall contractors keep drywall; etc. However, even these companies stock a lot of working supplies. Therefore, many of the companies to approach will be vendors of small supplies. If you could benefit from additional financing, approach any supplier or vendor who stands to reap substantial benefits and possesses the financial wherewithal to provide the loan. If you are not sure, ask. The worst response you’ll get is “No”. If you do not ask, you’ll never know what could have been.
For additional assistance, read the trade journals, industry news, books, and other applicable media to determine what the financing norms are for your industry. Use the norms as a guide only. Your supplier’s confidence in you, your negotiating skills, your ability to build trust and belief in you, and your account’s present and future value are what will ultimately determine your ability to tap into supplier financing.
All rights reserved.© Excerpted from Solving the Financial Equation: Financing Solutions for Small Businesses, available at http://www.Amazon.com. Please visit Toca Family Publishingfor more information.Tiffany Wright is President of Toca Family Business Services, a strategic advisory firm that provides interim CEO and CFO services, and the publisher of a commercial construction newspaper.