Steve Strauss, founder of www.theselfemployed.com, explains the concept of supplier financing and how it can be used to start a business on a tight budget.
Q: Hey Steve, I would like to start a business but I don’t have a lot of money. Also, my credit is not great. Would you know of any other ways I could start given my situation?
A: I do, and to explain how, let me start by sharing one of my favorite ‘business on a shoestring’ stories ever with you:
Arnold Goldstein had a vision: He wanted to open up a business too. And his problem was the same too - he had little money to do so. Undeterred, Goldstein went ahead with his plans to create a wholesale discount warehouse open to the public (this was before stores like Costco.) Goldstein decided that he would call the place “Discount City.”
He eventually did open that store, and a dozen more – using, as he put it in his great book Starting on a Shoestring, “$120,000 of unpaid-for merchandise that was heaped on $20,000 in fully mortgaged fixtures sitting on retail space with three month’s deferred rent.” Additionally, Goldstein writes that the first store “came to life owing everybody for everything.” “Best of all, it was started on a shoestring with only $2,600 of my own cash.”
Say what? Goldstein started a business with over $100K of inventory using only $2,600 of his own money. Wow.
This creative entrepreneur created his business on a shoestring using something called “supplier financing.” When people first learn of this, they are usually doubtful: Would a distributor or wholesaler really lend you cash, or extend you credit, or even stock your shelves on consignment?
As Goldstein says, “Suppliers can be a generous bunch.” Why? Because they want your business. They know if they help you, they likely get a customer for life.
Here is how to get your supplier financing:
1. Find the right supplier: A large, nationwide supplier will likely not help you; they don’t need to. But a hungry, smaller, regional supplier or wholesaler may be open to this idea. Look for someone who really wants your business.
2. Get creative: Let’s say that, like the great Arnold Goldstein, you want to create a business that will buy $100,000 of product from a supplier over the course of a year. You would be a valuable customer to that supplier, would you not? In that case, the right supplier might just give you your first shipment on consignment – once you sell it, then you pay them back, and if you don’t, they take back the product.
Here’s another example from Goldstein’s book: Peter started his business, an interior design shop, using similar methods: “I started the business, but had no inventory – or the money or credit to buy it.” But what Pete did have were brains and guts. He did his research and discovered that there were thousands of distributors in his industry. “That gave me 4,000 chances to succeed.” Before long, he got almost $100,000 worth of product in the store.
Again, the secret here is to have the chutzpah, vision, and endurance (it probably will not be quick or easy) to go out and find suppliers who need you as much as you need them. As Goldstein’s book proves, they are out there.
3. Get the right deal: You cannot ask for a lot of inventory, or a huge loan, or a long-term loan. You must have a plan for how you will sell the inventory, and/or a solid strategy for how the loan will be used, and how and when it will be repaid. Finally, have some skin in the game. If you are donating equipment or material, say so. If you are tapping credit cards, so be it.
Your commitment helps your cause.
Today’s Tip: Speaking of good books, a few new ones have crossed my desk recently and one I really liked a lot that you might want to check out is, “Word of Mouse: 101+ Trends in How We Buy, Sell, Live, Learn, Work, and Play” by Marc Ostrofsky.
One problem we all encounter these days is information overload. This book promises (and delivers) to help deal with, and overcome that. As Publisher’s Weekly says about the book, “Equally relevant for the tech-savvy individual who wants cutting-edge insights or the beginner who just wants to turn on his or her first mobile device, Ostrofsky's guide demystifies and simplifies all things tech.” Steve says check it out.