3 Ways to Get Your Vendors to Reduce Your Need for Cash

When we talk to young startups these days, we repeatedly hear them asking for the same thing, “Cash!” It’s true that a certain amount of cash is necessary for any startup. But when we press them and ask if they have taken full advantage of their hidden resources, they look back with vacant stares. Most have never thought about utilizing their hidden resources. Or worse, they don’t even know what their hidden resources might be or where to look for them.

Sure, we refer to them as “hidden” resources because they are not necessarily taught in school. Nor are they heralded by the entrepreneurial press. On the contrary, young people today are inundated with the idea that they can’t start a business unless they raise tons of cash. They are being told that they must borrow huge sums, take in large investors, or trade their equity for VC money. In fact, there’s an entire industry based on this premise.

We’ve seen startups who raise tons of cash tend to spend tons of cash in a “burn rate” that is often unsustainable. The cash itself seems to discourage resourcefulness. “Why scratch around for resources when you’ve got all this cash?” Never mind that you can achieve a positive cash flow before you burn it all up. Never mind that there were critical lessons you should have learned by starting out smaller and slower that would help you grow faster and bigger with a more solid understanding of the cost of sales. “Just give me the cash!”

Scaling Fast

The VCs want you to “scale fast and fail fast.” They are betting on 10 or 20 businesses just like yours. They’re playing a cold, detached, numbers game. They just need one unicorn in 20 to hit the jackpot. They expect to lose on the other 19. Why be in the other 19?

You don’t need to scale fast to be successful. You need to understand the cost of your own success. What happens if you scale fast and then find out that your products or services demand customer service that you are unaware of until you got out there? But now you’ve burned up all that cash the VC gave you and you can’t afford to service what you’ve sold.

How to Use Vendors as Bankers

Undercapitalized businesses are forced to grow slowly. In that process, they learn the true costs of sales. They also learn how to finance their expansion through cash flow management. But the most important thing they learned is how to use their vendors as bankers. These are your hidden resources.

Instead of borrowing the cash to pay your vendor, you get the vendor to buy into your integrity, your loyalty, and your growth plan, a plan that includes increased sales using their products and services. If they do, they will see you as a “partner.” This doesn’t happen overnight, but it’s a relationship that can be built by your behavior toward them.

1. Warn them before you miss a payment.

When you see that you can’t pay your bill on time, call them with advanced warning. Show them empathy for their position and the risk they’ve taken with you. This builds trust.

They have bills to pay and must use your funds to do it. Nobody likes a missed or late payment, but it’s way better to get a warning call in advance with a payment plan to become current, than to chase down a deadbeat. Put yourself in their shoes and treat your vendors the way you would like to be treated.

This behavior sends a message that you are the type of client they can trust. You have their interests at heart. They will extend credit and terms to a company like yours because you have mitigated their risk.

Extended credit and terms are the same as cash, cost less, and don’t require you to give up equity.

2. Consider a long-term contract.

Your vendors don’t want to work with you on extended terms and increased credit limits to build your business up just to have you take it away from them. They need some surety that they will see a return on their investment. A long-term contract will give them the confidence that you will stick around long enough to validate the risk they took “financing” your growth.

3. Have regular progress meetings.

Whether they ask for them or not, hold regular meetings where you update them on your immediate and long-term plans. Get them to buy into to your roadmap. Share the challenges that you face and the growth in business you both could have if you work together.

There will be times in your growth when you need more of their goods and services to take on a new big client that can result in increased income for both parties. If they see it coming, they can plan for it. They can make special allowances to help you land that big fish. They’re pulling for you!