The high cost of doing business with Wal-Mart
A small apparel manufacturer struggles to comply with the giant retailer’s requirements.
Carolyn Deason, San Antonio, Texas
I got lucky and showed my shirts to Wal-Mart locally. They love them, and one store has already ordered $2,700 worth of shirts and plans to order more this month. Other stores wish to order as well. I am a home-based business, very small, in business less than a year. Wal-Mart pays their invoices net 30 and requires me to tag the shirts with bar codes. Once I am in their vendor system, I can sell nationally. It's a great opportunity, but how do I afford the initial expenses to do business with Wal-Mart? It will run close to $6,000 to pay for manufacturing, printing, bar codes and tags.
By Soo Youn, Fortune Small Business Contributor
Dear Carolyn: If you can get binding purchase orders from the other Wal-Mart stores, that will make it easier to borrow money, says Chicago business consultant Ken Gaebler, chairman and CEO of Gaebler Ventures.
“Banks and individual lenders won't lend based on the entrepreneur’s hopes and expectations that other stores will soon be ordering,” he says.
Michael Diegel, national media director for the National Federation of Independent Business, agrees. “If you have orders in hand from Wal-Mart, you should be able to borrow from a local bank. If not, you should seek outside investors through your local Small Business Development Center, Chamber of Commerce, or personal network of friends and family. $6,000 is a small sum for many investors and should not be difficult to raise. The key is having the order.”
Be prepared to look at alternatives though, warns Mitch Jacobs, CEO of On Deck Capital. “Unfortunately, the size of the loan you are seeking, the amount of time in business, and the general uncertainty about your future (despite your great progress) make a traditional bank or SBA loan an unlikely source of financing,” he says.
A peer-to-peer lending site such as Prosper.com can also help you reach potential lenders. Another option Jacobs recommends is a loan management platform such as Virgin Money, which enables you to borrow from family members and friends in a structured and professional manner.
Another alternative is a home equity line of credit. “If you can borrow against any existing equity that you have, this can be a good source of short-term funding,” says Gaebler. “You just need to make sure that you are running the business in a profitable, responsible manner that won't jeopardize your personal finances.”
As a last resort, you could consider using an existing personal credit card or applying for a new one, assuming your personal credit is in good shape. But be careful.
“You will be approved on your personal credit score, which will increase your personal credit utilization,” says Jacobs. That could adversely effect your credit profile in the long run, so only do this if you’re absolutely certain you can manage the payback and the balance.
He adds: “Before taking any of these steps, make sure that Wal-Mart’s ‘always low prices’ still leave you with enough gross margin to cover the costs of the bar-code system and other fixed investments on the number of units you expect to sell.”
However, you should really do some research before you jump into a relationship with Wal-Mart – especially if you are having trouble getting your initial financing, say the superstore’s critics.
“You need a big dose of caution and reality,” warns Charles Fishman, author of The Wal-Mart Effect. “Many large companies have gotten into difficulty trying to supply Wal-Mart, while keeping their existing customers supplied, and struggling to maintain profitability and logistics as Wal-Mart's needs grow, and its pricing pressure takes hold.”
Fishman recommends connecting with some relatively small companies that already do business with Wal-Mart. “One way to do that is to simply go to Wal-Mart and pick some products from small suppliers, and track down their managers,” he says.
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From Ben Goldman I'd stay away from Wal-Mart if I were you. It looks rosy now but they'll pull the rug out from under you like they do with so many small business suppliers and small towns that grow dependent upon them.
Grab yourself a copy of "How Wal-Mart is Destroying America and The World and What You Can Do About It" by Bill Quinn, which is certainly alarmist but has facts worth reading as long as you keep them in perspective. Poke around the web just a little to see how this company's business practices are destabilizing neighborhoods and local economies.
Seriously, do some reasearch on their business practices (not just reading their corporate website but competing opinons as well) before you make that committment.
There's an old saying where I come from – "You can't shake the devil's hand and say you're only kidding." A smart sense of perspective when you deal with a titan this size.
From Murali, Trivandrum, India Dear Carolyn,
All most all the small Entrepreneur's are facing this type of problem.In my personnel opinion you please discuss this matter with Wal-Mart Management, and if possible ask them to help you in this matter.This will also help you for long run.
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Before any advice is given, I think a statement of CONGRATULATIONS needs to be made first to you. Getting your product into a chain like Wal-Mart is very impressive in my opinion. Next, I believe your worries about the startup capital required for you to do business with Wal-Mart needs to be put aside for a moment. Instead you need to concentrate on the relationship you are about to make with one of the largest retailers on the face of the earth.
Education about your customer will be key to growing that relationship. I agree with I couldn't agree more with the statements of Charles Fishman – research and contact other owners/managers of small suppliers to Wal-Mart. Learn from their mistakes and profit from them! My advice – take the phone call one step further – if you can try to set up a face-to-face meeting where you are taking the person to lunch or dinner so that you can get their full attention on your questions. Have your list of questions prepared before you meet, and go over as many as possible. Put them in order according to importance.
After you have all of the research complete, then you can build the plan of how you are going to supply your product to Wal-Mart. The first steps providing locally, should not be too difficult to plan out, you know your business – how you manufacture the product and you know what the requirements are from the store – bar code system, etc. Take advantage of this planning by going four more points of growth. First – what would it take for you to supply to all the Wal-Mart stores in a 100 mile radius? Second – what would it take for you to supply all the Wal-Mart stores in your state? Third – What would it take for you to supply all the Wal-Mart stores in a Geographic region of the US (Mid-west, Northern US, Southern US, etc)? Finally – What would it take for you to supply all the Wal-Marts in the US?
While the last question of planning is a little out there, you should run the total projections for all these points of growth. You need to know what your projected sales growths will be for any of the three stages, what your projected revenues vs expenses will be, etc. All the core foundations of a good business plan should be in place.
If you are now going, but I don’t have an MBA or a degree in Business Administration, I get lost in all of the numbers and such – you need not panic here. First, there are free services out there like SCORE. SCORE "Counselors to America's Small Business" is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA). Their website is http://www.score.org and there is a ton of useful information there. Secondly, Small Business Association, http://www.sba.gov is also a great resource for helpful tools and possible financial planning strategies. Finally, there are business consultants like myself that can assist in growing your company whether it be in regards to planning, growth strategies, marketing strategies, or IT infrastructure strategies.
Again, congratulations! You have achieved more than you think, don’t be scared by the challenges that lay ahead, thrive with the opportunity that is facing you!
Regards
Mike Holland
Managing Partner
Net-Flow Solutions
http://www.net-flowsolutions.com
http://netflowsolutions.blogspot.com/