It’s strictly business – Dealing with Brutal Bankers and Cutthroat Competitors

Calling the loan

I had the seven-year itch. After six years in business, it was time to expand our retail operation. Research had convinced me the future of the tire business was in retailing. Before long, tight margins would strangle wholesalers like me. So, I went broke. In one year we doubled our store count, from three to six, and poured money into marketing, equipment, and personnel. The rub? That little matter of being woefully underfunded. Because our marginally profitable wholesale division couldn’t support us, we were quickly up to our wheel wells in retail red ink.

Lower labor costs

Where appropriate, hire part-timers or try outsourcing. For sales, offer new hires straight commission or, if necessary, a modest draw. A differentiating product or service and sizable market will attract the right salespeople. If it’s last-resort time, reduce compensation across the board, all the way to you and the senior management team. Sincerely explain it’s only until the crisis lifts and ask them to hang with you.

Get concessions from suppliers

Share your strategic plan and growth projections. Smart suppliers will see where you’re going and how long it’ll take. They’ll get darned excited—and loosely-goosey with terms—if you can convince them your business will triple in five years.

Ask suppliers for promissory notes

You sign a note for, say, $1 million. The supplier credits your account for that amount and “sells” you $1 million in inventory. If you hit your numbers and continue to grow, you never accrue interest. The note’s just deferred year after year, like a self-renewing, interest-free loan.

Speed up receivables

Do the math. If your credit line is maxed out, offer customers a 1-percent-per-month “anticipation discount” for paying cash immediately instead of waiting thirty days. In effect, you’re borrowing at 12 percent annually (sky-high, but remember, we’re in the crisis section) while benefiting in three ways. One, you avert a cash-flow crisis. Two, you fund growth without giving up equity (venture capitalists expect returns a whole lot better than 12 percent). Three, your invoice shoots to the top of your customers’ “pay list,” which shrinks your bad-debt ratio.

“Factor” your invoices

In accounting- speak, a factor is a third party who buys invoices, or accounts receivables. This is a good way for a fledgling business to generate immediate working capital. Factors commonly pay clients advances of around 80 percent of the invoice value. Once the factor collects on the invoice, he pays the balance, or “reserve,” minus a factoring fee of between 2 and 4 percent. It’s a nice tool for collecting money in a day or two rather than thirty to ninety days. Downside: Expensive money.

Manage inventory

Thanks to technology, inventory management has never been easier. Good news, because just-in-time inventory is a competitive necessity. Turning stock every thirty days instead of every sixty days frees up boatloads of cash. Better still, with thirty-day turns and thirty-day terms, your cost of inventory is zero. Sixty-day terms are even better—collect in thirty, pay in sixty, and you get the use of your supplier’s money for thirty days.

The competition attacks

The day that an arm of one of the country’s largest companies announced its intent to crush us was like my own professional Pearl Harbor. They had boasted in a video at a national media fest that they were going to enter certain new markets and turn regional competitors like Tires Plus into roadkill. (Our Twin Cities base was their number-one target market.) Overnight, we shifted into warrior mode to defend the interests of our employees, customers, suppliers, and shareholders. Like a football coach who posts an opponent’s insults in the locker room, we used their braggadocio to whip our people into a competitive frenzy.

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Last word

Finally, we brainstormed around the clock. Within weeks, we had a fifteen-page action plan. A full six months before the invasion, we were on a war footing. We remodeled stores at each front, staffed them with our best people, lowered prices, and bumped up stocking levels. On the wholesale side, we blitzed commercial and fleet accounts in a five-mile radius of each threatened store. We even launched a mini preemptive strike, snatching a prime location our competitor was bidding on.

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