Everything Is Negotiable. The first thing to negotiate is your payment terms with your factory or supplier(s), ideally net 30 or longer if possible. They may say no at first, but keep pushing until you can get some type of terms upfront. This is easier to do early on when the orders are small; you can quickly establish credit and earn trust by paying your invoices on time (or even a bit early) so, as the order sizes grow, your supplier has no concerns about your creditworthiness. In doing so, you will order, receive, ship and collect on goods before you’ve even paid for them. At $100,000 a year, this can be helpful. At $1,000,000 a year, it’s mandatory.
Next, you need to negotiate your fulfillment costs. Whatever you’re shipping, you’ll probably want to try to find a fulfillment company to warehouse and ship your goods for you. This will keep your time free for design, marketing and sales – which is what you’re good at – and let them do what they’re good at. If set up correctly, then it should cost less than to do it yourself.
The most important part of your fulfillment arrangement is how and when you’re billed. Take for fictional example, all-in $1 cost for storage, shipping and handling. If you get quoted $1 for these services, ask your provider to bill you $.05 when your goods arrive at their facility and $.95 when they ship out to your customers, and again with net 30 terms if possible. This minimizes your out-of-pocket expense by collecting on the orders shipped before the bills for shipping those same orders are even due.
Finally, consider your freight providers, whether it’s your freight forwarder who brings your goods to the States or your own UPS/FedEx/USPS account to ship to your end customers. Get the best net terms possible, because every day counts.
Bank on Your Customers, Literally. If your new business is a great product with good demand, you can and should dictate COD/prepaid only for all of your customer orders. If it isn’t, you should get a factor. They decide and guarantee those who are creditworthy and whoever isn’t has to pay credit card terms. In other words, make them the bad guy. Your factor will loan you money against the creditworthy customer orders and the rest pay upfront.
Remember: It’s All in the Timing. If you can follow these three rules, everyone involved still makes the same amount of money and profits. The only thing that changes is when money changes hands and who is holding the risk. Thirty to 60 days can make all the difference. Although you’ll have to work hard to get this scenario set up, it’s well worth it, because you will be able to grow from a few thousand dollars to a few million with no outside investment, making it a lot easier to focus your energy on growing your business.
A version of this story appeared on the StartupCollective, a virtual mentorship program designed to help millions of entrepreneurs start and grow businesses. It was launched by the Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs.