The simple truth is that you need money to run a business. Without access to cash we face an opportunity cost that is seldom discussed – the limit to our ability to take larger orders.
Today I’m going to state something frightfully obvious: You need money to run a business. You may need a little money to do it, you may need a lot of money to do it, but in no situation that I can think of will you need no money to do it.
There’s been a discussion raging in our Mastermind Group recently about the ability or inability to extend credit — meaning payment terms — to clients.
In the early stages of my promotional products business I was naive. I figured I’d negotiate 30 day payment terms from my supplier, extend 30 day payment terms to my clients and voila, problem solved!
That really only works when your client pays early, since you need to allow time for invoices to be generated, sent and received, payments to arrive, checks or deposits to clear and cash to become available so you can actually pay your suppliers on time.
If your client pays late and you have no access to cash, that means you pay late, which is going to reflect badly on you, impact your credit and jeopardize your ability to get credit with your suppliers in the future.
Something else that’s rarely talked about when it comes to lack of money is the opportunity cost.
When we don’t have access to cash, it limits our ability to take larger orders, so we become less likely to pursue larger orders. As a result, we target smaller companies, smaller orders, smaller budgets, smaller opportunities and the business can begin to atrophy… and stagnate.
Some clients may be willing to prepay, but others won’t. It’s tempting to be annoyed by those clients. Why won’t they pay up front? After all, it’s their product we’re creating.
When asking for a prepay, I would often point out to a client that after a product is custom imprinted with their logo and their information, it really only has value to them. That’s why we require a prepay. It’s not like we could resell it to someone else after it has their logo on it.
Some clients were willing to accept that idea and move forward.
However, some prospects may have trouble overcoming their concerns about the idea of placing a large order with a business that lacks the resources to be able to process that order — let alone make good on it if something goes wrong.
Which brings us back to our original premise that you either need to have money or have access to money if you want to be able to remain competitive.
So what are the options?
Well, if you’re not independently wealthy to start with, then you have to look elsewhere.
One option is getting a loan or a line of credit from a bank or financial institution. Loans are better for large, capital expenses that get paid back over time, while lines of credit are better for transactional business like this, as they’re set up to be drawn down and paid back relatively quickly.
For example, you arrange for a $35,000 line of credit with your bank. A client places a $50,000 order with you. Your cost of goods from the supplier is $32,500. So you give your client 30 days to pay and your supplier gives you 30 days to pay. The order ships and the clock starts ticking. Day 29, you still haven’t been paid by your client. You call the client, the client says the check’s been delayed a week because the bookkeeper is out sick with a tummy ache.
So you access $32,500 out of your $35,000 line of credit from the bank and you pay your supplier for the order. When your client’s bookkeeper’s acid reflux is feeling better and they get around to paying you the $50,000 they owe you, you pay down the $32,500 you accessed from your credit line, along with interest and any fees and you use the rest of the money to operate your business. This works perfectly fine as long as everyone does exactly what they’re supposed to do — the supplier produces correctly, delivers the order on time, everything looks good and they pay you — then everything is great.
Some distributors use credit cards to do something similar. The trouble with that is the darn near extortionate fees credit card companies charge, not to mention the temptation to treat it as a loan and pay it back over time, rather than paying it down to zero at the end of each month.
A second option for financing orders is to use a factoring company. This is where you essentially sell your receivable to a third party. So in our previous example, you get a $50,000 order and you sell that receivable to a factoring company for let’s say $47,500. You get your money fast and the factoring company handles collecting the money from your client. So they’re the ones who have to wait around for it to get paid.
These examples may be a bit of an over-simplification, but you get the idea.
A third option in our industry is to affiliate with a larger distributor company. There are many different options in this regard. In some, you may simply function as an independent sales rep, where you sell under the company name and the company takes care of billing, collection and paying your commission. This is often done as a revenue split based on gross profit. So on that $50,000 order, if the gross profit is $17,500, you would be paid some percentage of that number. Other affiliate relationships allow you to maintain your own business, but orders are processed and payments are made through the larger distributor company. There are many different variations on this model, so the most important thing is finding the best fit for you, from both a structure and a corporate culture standpoint.
As you can tell from this quick overview, there are many different ways to tackle the money issue, but tackle it you must, because you’ll need access to capital if you want to be competitive.
I’ve always maintained the position that if we’re going to function like a bank, we need to be paid like a bank. And banks don’t offer interest-free loans.
If you’re new to the industry and need to get grounded in the essentials of promotional products sales, visit us online at topsecrets.com/gettingstarted
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