Russ owned a successful contracting business that did large "tenant improvement" (TI's) projects for building owners.
In his industry it is common practice that a contractor will have to float the materials and initial labor of a new job for 15-45 days before they receive their first payment from their client.
In Russ's case this might mean having to float $50,000-$250,000 until they receive their first check.
As you can imagine, the faster he's grown, the more capital Russ needed access to fund that growth. Bigger jobs required even bigger startup money.
Russ isn't alone. What most business owners don't give enough consideration to is that growth almost always sucks up cash. The faster your growth, the greater your need for sources of capital to fund that growth.
Smart companies know they need to plan in advance of that growth to secure the capital reserves or funding sources to afford that growth.
Here are seven ways to use your vendors to finance your growth. (NOTE: I need to say thank you to our business coaching clients who over the past decade have helped us crystallize our methods of securing expansion capital.)
1. Build your relationship, strategically share information and ask for input and help from your vendors.
Remember, your vendors are partners in your growth. When you grow they win by getting more business from you.
For example, Mark owned a service business. When he started growing at 30 percent a year rather than him hiring more service techs, he went to his largest vendor and asked, "As you know we're growing fast and we've really appreciated working with your team of service techs. I just wanted to know, how much more business can you handle from us? I'm asking because I need to see how much of our business we need to find another vendor to give the overflow to."
When Mark asked his vendor this question the vendor immediately agreed to hire on several more service techs to absorb Mark's growth. This saved Mark from having to take on the additional overhead of the techs himself, and he turned a fixed expense (payroll) into a variable expense (outside vendor), which in essence was one way to fund his growth.
2. Get your vendors to increase your available credit and lengthen the period before you must pay them.
The best time to ask for better payment terms is before you need it. So plan to ask your vendors for better and larger terms and limits every 6-12 months. As they see how well you pay and how you honor your commitments, they are more and more willing to extend your limits and in many cases, even give you more liberal payment terms.
Find ways to trade products or services to conserve cash for growth.
One of our business coaching clients traded out $20,000 of his video production services for a professional service he needed. Everybody won.
Sometimes all that's needed is a bit of creativity and a little horsetrading.
4. Consider engaging your vendor into the mix when you have a big opportunity as a strategic partner.
Got a big contract you're going after? Involve your key vendor(s) in the negotiations or hunt from the start. This vested interest makes it all the more likely that they'll help out financially (often by being liberal on your payment terms or even advancing you start-up capital for the project).
5. Build healthy relationships with your vendors and, if needed, work out win-win ways they can help you get through a cash flow crunch.
They can be excellent champions to have on your side. But this requires that you both build a track record of honorable behavior, and also keep them in the loop (appropriately so) when you're in a tough situation.
6. Arrange a "success fee" structure where you don't pay up front but rather upon the successful performance.
Can you pay for performance versus as a fee up front? Can you pay a smaller fee for their product or service with a back-end kicker for the results you generate? You'll likely pay a good bit more, but your upfront cash required will be a lot less, and so will your risk.
7. Get your vendors to formally finance your purchase.
This is a very common practice when purchasing or leasing capital equipment. In effect, your vendor becomes your bank, financing your purchase or use of the equipment.
Yes you'll usually pay a premium for this source of financing but if the numbers make sense and your return on investment warrants it, often times it can be a great way to fund part of your expansion and growth.
So when you're running a fast growing company, think about how you can meaningfully engage your vendors to help support your growth.
For more ideas on growing your business, including a free tool kit with 21 in-depth video trainings to help you scale your business and get your life back, click here.