How to Finance Anything
A user's handbook to the hidden cash sources of the '90s.
From new businesses to new products. A user's handbook to the hidden cash sources of the 90s
If you've been beating the bushes for money and are coming up empty-handed, you're not alone. For the past two years business owners from Bangor to Bakersfield have seen the most severe credit tightening in recent times. Bankers in some areas of the country, especially those where real estate values have fallen furthest, have gone so far as to demand repayment on non-real-estate loans that were current in both interest and principal. It's reached a point where many lenders quietly admit they've all but given up making loans to smaller companies unless the deal is risk free. Among other things, lenders simply don't want to face more criticism from federal bank examiners.
Other established sources of money, like venture capital, are for now even further out of reach. To begin with, most venture capitalists are out of money; hundreds have ceased operations altogether. Those with capital available are saving it for the businesses they've already invested in (partly because they can't get banks to lend them money) or deals they can get in and out of quickly and profitably. Younger, smaller companies need not apply.
Will this financing environment improve anytime soon? Some people who've lived through previous credit droughts answer, without question, yes. When the flowers begin popping up in late spring, these optimists predict, bankers, too, will reappear with a new appetite for lending. Perhaps. But don't expect anything resembling the sorts of deals we saw in the 1980s. The scars are simply too deep.
So what should companies in need of money be doing these days? Well, the best (and cheapest) money around often comes from managing your business more efficiently. But if, after rethinking the way you handle different parts of your operations, you're still coming up short, we've pulled together some ideas for you to consider. Some of them are old ideas that merit a new look; others are newfangled responses to recent market conditions. We wish we could say they're all simple to execute, but many are not. They will require a lot of thought, time, and effort.
This catalog is not a comprehensive listing of every financing technique and deal around. Rather, our goal is to help you understand the range of possibilities, avenues to explore, and types of people who can help. We've used the following coding system to help you find what may work best for your company:
S = Service Company
R = Retailer
M = Manufacturer
S-U = Start-up
Leaning On Suppliers
For research-and-development support (S, M, S-U) This has potential for any business whose product or service is made up of things furnished by other companies. If you can show suppliers how they'll benefit from your product, you may be able to get them to front you products or services or both -- and even money -- during the R&D phase. The most obvious opportunity is in technology: a well-heeled backer gives you money or technical help to spur your development work. To provide a little extra incentive, you might give the supplier some options on your product -- say, a license to market it in a particular setting.
But such deals are by no means restricted to high tech. Take, for example, a home-design company we recently heard about. It arranged significant support for the development of new designs from a large manufacturer of building products. The help comes in several forms: cash, supplies, and marketing support. (The manufacturer will mention the design company in its ads.) While the manufacturer hopes the small company will become devoted to its products and spread the word, that's not guaranteed in the agreement.
To get a supplier to help with development is not an easy sell by any means. But when it works, the payoff is terrific.
For longer credit terms (S, R, M, S-U) If you're a young company, even a start-up, you may be able to convince your key suppliers that, by extending longer-term credit, they'll be nurturing what will become a substantial, long-term customer. True, many suppliers have become skeptical about such promises -- and there are plenty of stories of customers who try negotiating such deals when they're already in trouble. The key is to provide your suppliers with credible plans along with forecasts showing how they'll be paid.
A few years ago a start-up we know in the food-processing industry was in a cash-flow bind owing, in part, to the difficulties of one of its vendors. So the start-up asked one of its biggest suppliers (a large corporation) to provide about $200,000 worth of material over eight months and to stretch payment on those goods over two years. The company wasn't asking to delay payment on everything; indeed, it would pay for subsequent supplies it ordered within 60 days. What's more, it pledged not to squeeze the supplier on price. (It would buy from the supplier exclusively.) What happened? Well, the supplier agreed to extend payment at a rate 1% over its own cost of borrowing. The note was paid off on schedule, and the food-processing company is still buying from the same source. Clearly, the supplier took a big risk, but it gained a loyal and growing customer.
To finance inventory, part one (R, S-U) Say you're a retailer or a wholesaler and you want to accumulate inventory, but you don't want to -- or can't -- finance it. See if your suppliers will ship the merchandise on consignment, which means you won't have to pay for it until you sell it. The suppliers most likely to agree to this arrangement are those that need to get their products into the field in order to achieve their own sales goals. We know of furniture and clothing stores that have been able to take advantage of consignment selling. It's an arrangement worth exploring -- and maybe even giving up some profit for -- if you want to avoid additional borrowing.
To finance inventory, part two (R, M, S-U) Auto dealers have long relied on floor planning from manufacturers. You can adapt the idea for your company. Say you want to get the most favorable prices from suppliers, but you can't buy your entire season's inventory at once. First, you don't need it all at once; second, you can't pay for it. With floor planning, you get the products and the invoices in phases. A former Inc. 500 company that made components for car sound systems, for example, used to place one big order and negotiate the price up front. Included in the negotiations were two installments for both delivery and payment. The company was able to reduce its payables by thousands of dollars until it actually needed the parts.
