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Looking to the Next Level

There are alternate places to find the working capital you need.

Question: Our business has grown quickly over the past few years, but with the recession hitting our industry, we're having a tough time getting a bank or an investor to give us the working capital we need to get to the next level. Any suggestions?

Answer: Try tapping your suppliers. Apart from you and your partner, nobody has a bigger stake in your business' success than the companies that provide the labor and materials you need to deliver your products and services. If you're thinking of expanding into a new market or geographic territory, your supplier may see an investment in your business as a guarantee of future revenue and market share. On the other hand, if you're unable to pay your supplier for purchases you've already made, he or she might consider an equity stake in your business as an alternative to not getting paid or forcing you into bankruptcy. Either way, having a supplier as an equity partner can give you breathing room by freeing up cash--assuming the equity is swapped against the value of past, present or future orders. "The key [to getting your supplier on board] is to prepare a business plan demonstrating how and why you will succeed and what the payoff for your supplier will likely be," says consultant Joe Fulvio, who specializes in working with startups and emerging markets. "You need to show not only a direct return on investment, but also the value of future business to be gained by making the bet with you."

Be sure you clearly define what the equity given to a supplier gives you in return, Fulvio says. Also, make sure the deal is fair to both sides and spell out the boundaries between the customer-supplier relationship and the investor relationship. But beware: Giving a supplier a stake in your company may create competitive conflicts for both you and your supplier, and the last thing you need is for your supplier to prevent you from achieving your company's long-term goals. Says Fulvio, "Negotiating a noncompete and nondisclosure agreement is essential."

Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York City consulting firm that advises startups and small businesses, and author of Getting Rich Without Going Broke: How to Use Luck, Logic and Leverage to Build Your Own Successful Business. Reach her at rosalind@abcbizhelp.com or through her website, abcbizhelp.com.

Rosalind Resnick is a New York-based freelance writer, entrepreneur, investor and author of The Vest Pocket Consultant's Secrets of Small Business Success.

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This article was originally published in the December 2008 print edition of Entrepreneur with the headline: Seeking Investors.

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