The high cost of doing business with Wal-MartJune 12, 2008: 11:23 AM ET
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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