Getting your capital -- all of it -- from your suppliers isn't easy, but it can be done

Like many an entrepreneur before him, Dennis Chang was long on chutzpah and short on cash. After bouncing around the computer industry for eight years, he burned to become another Frank Carey, the architect of IBM's masterly marketing strategy. By January 1986 he had a business plan modeled after IBM's and Apple Computer's. He had even found two partners whom he liked to think of as his own Steven Jobs and Stephen Wozniak. But he had no savings, no investors, and no willing lenders.

He still doesn't. Yet for the fiscal year ended last September, his San Francisco company, Jasmine Technologies Inc., logged sales of more than $35 million on its disk drives and other Macintosh-compatible components. Chang, 40, financed this astonishing growth with some of the most reluctant lenders around: his suppliers.

Leaning on the people who sell you your raw materials isn't the sexiest way to finance a business. There's no nice fat sum of money laid at your feet by venture capitalists, no reassuring line of credit at the bank. In fact, supplier financing is often messy and precarious. It had one serious advantage for Chang, however: it was his only option.

Everyone knows the official textbook rule on such backdoor finance. It says: Put off paying your suppliers as long as possible -- period. That's fine if you already have suppliers. But if like Chang you barely have a product, much less a track record, it simply doesn't apply. The trick was to get not only his raw materials, but his office equipment, advertising -- his entire business -- on credit.

Fortunately, Chang didn't know the first thing about official finance. "Everything I was doing was intuitive, seat of the pants," he recalls. Ignorance led him to treat supplier finance as a fine art, not a science. And that was the key to his success. It meant that Chang was guided by personality and attitude, not by rules and numbers. Of course, personality and attitude were all he had -- thus the birth of Finesse Finance.

Chang's first lesson was about the power of the personal guarantee. The problem was advertising. Chang's entire business plan hinged on it. With no other means of selling or distributing its Macintosh-clone peripherals, Jasmine was relying on an advertisement in Macworld magazine to educate Macintosh users, to promote its product, and to produce prepaid orders. Trouble was, Macworld insisted that Chang pay for his ads. But he couldn't; he had to get them on credit.

All it took was conversation -- a couple of months of it. Chang was on the phone almost every day with San Francisco account executive Penny Rigby and the magazine's credit department in New York City. They discussed Chang's education, previous jobs, personal finances, business plan, marketing strategy. In the end, he consented to personally guarantee a credit line of about $30,000, an obligation he could meet only by selling his house.

Chang had resisted that last step because he didn't want to risk the house. Yet resistance turned out to be the perfect tactic. By the end of those months of talking, a funny thing had happened: Rigby and the credit people were emotionally committed to him. Still, they wanted Chang's guarantee. Of course, Macworld knew its fledgling advertisers well enough to recognize that a guarantee from a start-up company didn't necessarily guarantee anything. But it gave the magazine's bean counters a security blanket -- so they could do what they already wanted to do, which was to back Chang. Lesson one: The power of the personal guarantee lies mostly in what you do before you give it.

Now, Chang was really rolling. Or so he thought, until he tried to find a leasing company that would agree to rent him some telephones, typewriters, copiers, and computers. It didn't take long before the solution hit him: he'd simply "recycle" his personal guarantee. He might as well. All the money he had was $40,000 of equity in his house, most of which would be eaten up by Macworld bills, if it should come to that. Guaranteeing $12,000 to $15,000 in payments to a leasing company couldn't make him any more vulnerable. What's more, he soon discovered, suppliers make it easy. Few ever asked how many other credit lines he had personally guaranteed. And therein lay the second lesson: The first guarantee devalues all subsequent guarantees, but your suppliers don't know that.

For some people, Chang learned, getting paid wasn't nearly as important as growth, or, say, bucking the status quo. These were the suppliers who were motivated by the same thing that drove him, his soul mates in ambition. He spent hours with such small companies describing his vision of Jasmine's future. "I sold them on the value of our growth," Chang says. His raw materials often cost 20% to 40% more than a large supplier would have charged -- but then, large suppliers didn't even want to talk to him about credit.

Large companies, in fact, are apt to be the most intractable group you'll encounter. They're not likely to identify with you as a struggling entrepreneur, and they've usually got too many rules to make an exception, no matter how charming you are. But you can make their size work to your advantage. When big companies make a mistake, it's often in a big way.

Chang got two of his most important vendor relationships by being a good Samaritan to one that stumbled. A large supplier of platters -- the disks that go into disk drives -- had bet that IBM would move quickly in adopting a new technology. Wanting to be ready, it pushed ahead, producing the platters IBM would need. As it turned out, IBM moved slowly, and the platter maker suddenly had a huge batch of excess inventory.

Chang happily offered to buy the platters. That move earned Jasmine a relationship with a grateful disk supplier -- a critical tie that had until then eluded the company. The disk maker played another important role as well, by introducing Chang to Arrow Electronics Inc., a large company that warehouses and sells platters. It was at Arrow that Chang bumped into the invisible credit limit.

"Arrow initially gave us a $50,000 credit line," remembers Chang. "We were growing 30% a month, so we exceeded it." Nothing happened. Jasmine paid Arrow's bills, then it again exceeded the credit limit. Again nothing happened. Eureka! "I finally realized that we didn't really have a credit limit. I started ordering product like crazy."

It wasn't long before Chang faced a new problem with his vendors. It was no longer a matter of persuading them to be his suppliers -- it was that little matter of how to pay them. In the beginning, he had made certain all bills were paid on time. But now Jasmine's growth was chewing up cash. The company had begun to hire more people, sponsor booths at trade shows, and advertise more heavily. It was the perfect time for Chang to observe the time-honored custom of payable stretching, right?

Wrong. Chang looked at his suppliers and saw a few dozen small, relatively unimportant ones and a handful of crucial ones. Rather than spend all his money on the important suppliers, he devised a kind of reverse triage: he'd pay the small bills right away and drag out the big ones. He figured that if they shut him off, the small vendors could hurt him just about as much as the big ones. And besides, he could afford to pay the little bills. And the big vendors? Well, they wouldn't get green notes from the U.S. Treasury, but they would get plenty of Dennis Chang's private currency -- personal attention.

He talked to them every day. He returned their phone calls immediately. He took their families out to breakfast or lunch. If he managed to scrape together part of the money Jasmine owed, he personally hand-delivered the check. In short, he paid them with evidence of his intense commitment. When the cash crisis was over, he found, those suppliers felt like partners in his success.

Despite that success, it's clear that supplier financing is no substitute for more conventional forms of capital. With no outside equity in the company, Jasmine's heavy reliance on suppliers' credit makes it look terribly overleveraged. That, in turn, makes the company unappealing to banks and other lenders. Lack of both equity and borrowing capacity means it has no cushion against a temporary drop in sales, such as it suffered early last year.

There is an upside, though. It worked. It worked well enough that Jasmine is no longer a seed company or a start-up -- it's up and running hard. And that makes a world of difference to potential investors. Chang says he's constantly being approached by venture capitalists, investment bankers, and other investors, but he's not letting them turn his head. As usual, he has a plan: "The longer we hold them off, the less we have to give away of our company," he explains.

This could be the start of chapter two of Finesse Finance -- but that's another story.