Kicking off a new business, often because of securing either a distribution deal or orders from a large corporate can be exhilarating.
If you haven’t imported or manufactured before and are about to cut your teeth negotiating with large corporate buyer terms, the waters can suddenly become murky.
When we first deal with new businesses that have no collateral except for their orders (or forward contracts) we like to make the relationship prove itself first with a smaller amount of available credit.
When we say available credit, we will approve a larger limit, but only make available a smaller amount.
Making mistakes in the supply chain can be fixed when the numbers are small and the client can easily and cheaply navigate through the problem.
Scale up the funding too soon and the amount of money to fix problems becomes insurmountable.
To reach your full credit limit, we like to see your cash turn a few times first. Financiers want to have a look at how a client and their customers behave on a smaller scale. On a small scale finance problems are the clients, on a large scale finance problems become the financiers.
From the client’s point of view, doing a small advance first allows the client to get a look at how our processes work. The client will see where the pain points in the deal are going to be. They get to do this before they ‘burn’ themselves taking a large order only to find they cannot deliver on it due to the “black swan” issue that inevitably seems to pop up usually due to inexperience.
It is not an uncommon practice to see supply agreements inked in a particular way and to find that they operate commercially much differently.
Contracts don’t always reflect what happens operationally. In any type of business transaction, there are always a number of assumptions that need testing.
Testing of assumptions can only be done in real life and by physically going through the actions. Therefore, as with profit before growth, it’s best to do the testing on a small scale and do a few transactions with a financier to smooth out any bumps.
Now read: The theory of good capital vs bad capital: Going for profit over growth
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Stak works with clients that sell to some of the largest buyers in Australia & overseas.