Depending upon the business you’re in and the relationship you have with your customers, it’s not out of the question to consider acquiring financing from current customers. You’re probably thinking, “They already buy stuff from me, why would they lend me money too?”
That’s a good question. Let me offer you what I would hope would be an equally good answer.
Back in the early 80s I was a field sales rep for my Dad’s industrial supply business serving the big construction companies and other smaller companies in the oil fields in southwestern Wyoming and eastern Utah. Among other things, I sold the heavy-duty stud bolts and nuts that held together the wellheads on the oil rigs. We carried the special fasteners in the common sizes used by most of the wellhead companies, but we also stocked the same diameters in bar stock so we could cut to custom lengths if needed.
At first, we were the little supplier out of Salt Lake, but as time went on and our relationships improved, we did more and more business in the oil field and got introduced to new products our customers wanted us to warehouse so they could purchase from us instead of ordering them from Texas or Oklahoma. Some of these products required that my Dad purchase specialized machine tools to manufacture stud bolts for unique applications.
Although my Dad didn’t take their offer (as I said before, he hated being in debt he didn’t need to), one of these customers offered to lend Dad the money to purchase these machine tools so he could specialty thread and machine these unique bolts for him. My Dad saw the market need and decided to purchase the equipment out of cash flow—but the option to take the financing offered by his customer was on the table and available should he need it.
Since that time, I’ve been aware of other instances where a customer has offered a vendor financing to purchase equipment or expand to better meet that particular customer’s needs. Of course it requires a good customer relationship and a consistent ability to meet your customers’ needs, but in many industries it isn’t uncommon.
The offer my Dad received from one of his customers isn’t the only way your customers can be a source of income in addition to their patronage of your business as a customer:
- A letter of credit: For example, a large customer places an order for a steady stream of your product. In order to fulfill that order, you’ll need to purchase more parts or raw materials to keep up. To purchase the raw materials, your customer provides you with a letter of credit as security for the purchase of the materials, allowing you to make the purchase without tying up your cash flow.
- A down payment: In some businesses (particularly on big orders) it’s not uncommon to be required to pay a percentage of the cost of the order up-front to acquire the raw materials to do the job. This is very common in the construction business. In other words, the customer is advancing (or lending) the company the money to get started.
This is more common in some industries than others and is usually associated with long-standing relationships and starting larger than average orders.
Please share any personal experience you might have with leveraging customer good will into financing your small business.
Click HERE to learn more about what the banker is really looking for.
Learn about what it will take to get a small business loan if you have bad credit HERE.