Is having an 800 lb gorilla as a customer worth it?

February 15, 2011

All business owners want to grow and be successful. It is part of the entrepreneurial spirit that made them want to be in business to start with. To many, supplying products or services to extremely large businesses on a large scale is the holy grail of sales.

Gorilla

Big companies and especially big box retailers can be very difficult to work with. Going into a relationship with an 800 lb gorilla with open eyes and a little knowledge will lessen the pain and increase the chances for a good relationship. Though there are so many things to learn and consider when doing business with a large retailer, this post is going to be limited to addressing various financial considerations a business should weigh before doing business with that “dream customer.”

Business owners need to stop and ask a few questions.

  • Can they provide all the services that the large corporation wants and expects?
  • Can they make a fair profit on the overall relationship?
  • Can they afford to carry a potentially slow paying customer with a large balance?
  • Will this single customer make up more than 25% of your company’s annual sales?
  • What additional equipment and capital expenditures do I need to make to handle the increased volume?
  • What kind of additional customer service (or technical) personnel will I have to add to manage the relationship?
  • How much additional working capital will I need to finance short-term assets?

When a business owner can answer these questions and they have thought through all the contingencies then it is time to win the account.

From a financial standpoint, there are two kinds financing that is necessary to ramp up to support a large corporate customer. First the smaller supplier must have the cash or financing to “mobilize” the relationship. This means manufacturing the first order, hiring the additional personnel necessary to handle the customer’s needs, buying any equipment necessary, and setting up the necessary Electronic Data Interchange (EDI) between your IT systems and your customers as the customer requires.

The second form of financing is working capital. This is the cash that is necessary to carry swelling and slow paying accounts receivable, increased payroll, more raw materials, and all the necessary things that go into servicing the customer on a regular basis.

From a risk and cost perspective, these two types of financing should come from two types of loans (as necessary).

The mobilization loan should be a fixed term loan of no more than two or three years. The loan should “prime the pump” by providing all the necessary material, equipment and personnel necessary to get the project to its first delivery of goods or services.

Most companies don’t have enough profits and retained earnings to provide all the necessary working capital. If you don’t you are going to need a bank line of credit or a commercial financing relationship with a factoring company. Banks often provide lines of credit to support accounts receivable and inventory, but they often limit the size of the line of credit based on historical financial data and past profitability.

Factoring companies can provide a highly leveraged loan against accounts receivable and as long as the ultimate debtor is credit worthy, they can provide “near-unlimited” working capital for growth.

Some banks and factoring companies will provide a hybrid for the line of credit. The bank will provide a line of credit up to for example $300,000 and a factoring company will finance the additional accounts receivable above that. In finance language this is called an over-line. This type of relationship provides a business the best finance rate and the highest advance rates possible.

Topics: Operations, Sales, Featured, Blog Posts, Customer Service

Sam Thacker

Business Finance Solutions

Sam Thacker is a partner in Austin Texas-based Business Finance Solutions. He has spent the last 16 years in the banking and finance industry as a commercial lending officer, banking consultant and advocate for small business financing. He has originated over $400 million in loans to hundreds of businesses in many industries. Sam has been on the financing end of numerous businesses over his banking career. Sam is a nationally respected working capital finance professional and writer. In addition to helping small companies obtain working capital financing using a variety of assets, Sam writes a widely read finance column which appears three times a week in many traditional and online news outlets throughout the United States. He writes about the challenges of small business finance, accounting, and best business practices. He has been praised by readers for his ability to explain a complicated financial concept in easy to understand terms. Sam also writes a once a month business column for the Austin Business Journal . Sam regularly teaches classes at Texas State University’s Small Business Development Center (SBDC) on financing small businesses, financing government contracts, and other topics of interest to small businesses.
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