Borrowing from Customers

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When Van Strom, president of American Design & Manufacturing, a $2-millionadvertising-specialty manufacturer, in Seattle, needed to buy a $100,000 embroidery machine, he financed it through an unconventional source: oneof his company's biggest customers. "We would both benefit," he says. "Increasing our production capacity would increase our ability to service thatcompany's needs."

The customer advanced $30,000 as a down payment for the new machine, with Strom's company paying the rest of the cost in monthly installments.American Design then paid off the $30,000 credit, along with the monthly interest charges, by fulfilling production orders for free.Strom agreed that if the company ever became unable to fulfill the orders, he would pay the customer with cash instead of credit. "The deal was so simple, soclean, so fast," Strom says.

The one glitch, though, was the drain on cash flow. "We failed to anticipate how much demand that company would have for our product. Its orders came inso quickly -- without cash payments attached, of course -- that we had to stretch our other payables to meet payroll," says Strom. If he borrows from a customeragain, Strom plans to specify six months as a minimum payback period. That will leave his company enough time to take on cash-producing business, too.

Last updated: Jan 1, 1995




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