Suppliers as Funders
In the last article, we looked at the some of the most traditional routes for generating investment funds. There was a time when banks were the only place where you could raise money and even then you were asked for your proverbial first born before you were given a cent!
But life is very different now. In the next couple of articles, we’ll look at a whole range of innovative options – some of which might appeal to you as an e-commerce operator.
Let’s start with your suppliers; firstly, unless you have found a new way to sell air or water, then you will either need to buy in raw materials to make finished goods or purchase the finished products themselves to sell on your site. We’ve discussed before how every business and every online store has different dynamics- so not all the suggestions we mention here will be appropriate.
Sale or Return
Suppliers are just like you; they want to find ways of selling more of their product and sometimes they are willing to give you a leg up. If you can persuade them to use your site as a shop window for their products and only charge you once, a product is sold then you have an instant funding benefit. This obviously requires honesty and clarity on your part to make sure sales are accurately reported. By agreeing on a deadline for the products to sell or be returned to the supplier, you can even de-risk your investment altogether.
So why would a supplier help to fund your business in this way? Here are a few good reasons you may want to suggest:
- You may give prominence to your store to suppliers’ products who offer this service
- You may commit to a longer term relationship with that supplier
- You may be willing to pay slightly more for each product sold to have this service
It’s not a ‘given’ that suppliers would offer this facility to you, and if they are a small business themselves, then it may be more difficult. However, some may be willing to offer extended credit terms, which, although does not de-risk your liability to pay for the stock at some point, it may be enough for your needs.
This is a more acquired and specialist route for supplier financing. It essentially means that the supplier ships the goods to your customer directly on your order. There will be a limited number of suppliers willing to offer this, but if they do, then it does mean that your investment in stock is much lower.
It has to be said that there can be complications with this approach. Your supplier may be a wholesaler and have no capability to send out individual orders – in fact; that’s one of the key values that they may see you as adding. Also, it does mean that your supplier will have your customer’s details. You’ll need assurances that they won’t add them to their mailing lists or approach them directly in the future.
It’s also more difficult to control the quality of service – because the process is one step removed from you.
Finally, if there are large numbers of drop ship-based orders, then you will need a good system in place to pass on the details to the supplier and a solid follow up the process.
This route isn’t for everyone – but if it’s available, then it can make a substantial difference to your cash flow.
In some industries, manufacturers, in particular, will often have loan schemes for their ‘channel’. The IT and electronics industry is a good example where, in the right circumstances, they will loan your business money to sell their products.
Essentially whenever a supplier gives you credit, they are loaning you money, but some schemes are more formal than a simple credit account. The schemes mean they either offer you a Term Loan (just like a bank) or extend a line of credit with a repayment profile that does not necessarily follow your buying pattern- and allows you to build up your receivables before paying them.
Interest rates for these schemes tend to be lower than banks but the supplier may still want some security and may ask for a charge over the business assets while there are outstanding sums.
It all depends on the industry in which you operate your store and the products you sell as to whether suppliers can provide the funding. But remember, they want to sell their products, and you are their shop window – so don’t be embarrassed to ask them how they can help fund your expansion.
In the next article, we’ll be looking at some 21st-century funding options that have grown up to replace the banks.