Community Economic Development Fund

Articles and podcasts to help plan and operate your enterprise.

Be ready to wrestle the bear

In recent months, this column has addressed competition with Amazon from a couple of different perspectives. While current statistics still show the majority of sales on the site are made by third party sellers (who might actually be a small business owner),there’s a conspicuous trend toward the giant taking over more and more of the pie.

This New York Times article detailed the challenges, frustrations and dependencies that come along with selling through the platform. I can think of two clients who have fought the bear and walked away after being bitten.

One client, selling a proprietary product directly to Amazon and on the site through approved dealers made the hard choice of cutting off the grizzly. You see, Amazon won’t agree to minimum advertised price (MAP) policies and instead it makes sure it “wins the box.” That is, by showing the lowest net price it places its own listing ahead of other sellers.

This results in the price of the merchandise spiraling downward, undercutting the dealer network. So, our client effectively walked away from millions in future Amazon purchase orders to protect the integrity of its primary distribution chain. Who can blame them? How can you justify betting it all on one outlet (even one named Amazon) when the dealer distribution chain that helped you grow your business would be at risk?

Another client who manufactured personal care products found his supply chain leaking. He suspected a distributor was selling merchandise to unauthorized dealers who were reselling on Amazon and undercutting the brick and mortar dealer network. While this diversion wasn’t Amazon’s fault, our client hit the Amazon brick wall trying to get help to control it. He worked for months to prove to the Amazon bureaucracy that he owned his own trademarks and was classified in the right merchandise category and therefore qualified to invoke an Amazon policy that would allow him to shut off those unauthorized sellers. Business is tough when you can’t get anybody on the phone to discuss your protests. Eventually, this client realized that even selling direct to Amazon was no dream. For every item purchased by one Amazon warehouse, another would ship back his unsold goods. The slow payments and return fees effectively canceled each other out.

Now, if you’re thinking of making a late entry for your business into e-commerce, don’t be discouraged just because Amazon seems to outsell the next seven largest competitors combined (yes, including Wal-Mart). And don’t think that just because your industry’s products are already on the site (and cheaper?) that there’s no response you can make.

Yes, commerce is shifting online. Yes, customers are beginning to expect to shop this way. Yes, Amazon is a formidable, perhaps even a predatory competitor. Remember, there’s more to selling on the internet than on the one dominant platform. Sure your sales volumes will be lower, but keep your eye on the long term and look for a way to satisfy customer needs beyond price and speed.  Emphasize service and experience and you’ll have a better chance to survive your walk through the woods.

-- Frederick Welk
CEDF Business Advisor

 

 

Where does small business get its capital?

Recently I was asked to pinch hit for a presenter at an SBA-sponsored Reboot workshop for veterans interested in starting their own businesses. CEDF was pleased to host the event  at our Meriden office.

The presentation was on access to capital and the material was part of a standard curriculum the SBA has developed. I was intrigued by this video (available on YouTube) from the Kauffman Foundation that is used as an intro for the segment. It provides a very clear and understandable overview of the small business funding landscape. And although the video was created in 2011, it still is current enough to be informative.

Using the white board sketch format of explainer videos, the Kauffman Foundation narrator described the sources of capital for young companies. More than half, he said get all they need from a combination of personal savings of the founder and business cash flow. That’s encouraging and it shows not only good planning toward capital accumulation but also the opportunity for quick success in the marketplace. I imagine these companies didn’t have founders taking much in the way of draws out of the business too soon either.

The next source highlighted was credit cards. It’s an understandable choice for working capital whether the founder uses a personal card or a business card. (Think plural -- cards -- because the reality is that many business owners tap several cards, often getting into trouble by not being able to repay on schedule and seeing interest rates climb into the penalty range.) Credit cards are also the little-discussed way that banks have chosen to stay involved in small business lending. While the increasingly tough terms and conditions for bank lending over the past 25 years have eliminated most new businesses as term loan borrowers, many banks will still offer them credit cards. To some degree, this is because a credit card more closely matches risk, with lower credit limits and higher potential interest and fees.

The video next discusses the use of friends and family for either loans or equity. They point out that many small businesses only resort to this after they have tapped out the easier sources like credit cards or personal savings.

Now, the discussion arrives at banks and the reality that banks provide very little funding for young companies because of shareholder and regulatory pressures to only make loans secured by assets, which young companies typically do not have.

Finally, despite the frequent attention given to famous start-ups, venture capital funds only a small fraction of firms. And of the fastest growing firm, the video states less than 20% took any venture money because most didn’t want it. They were willing to use other sources to avoid giving up ownership. Eight years after this video was made, this is likely still the case.

Only in passing, since these niches were reasonably new in 2011, is there a mention of angel investor groups and peer-to-peer funding. Both have grown in importance since the video was created. And there is no discussion of merchant cash advance lenders and what we call the “easy internet lenders,” who provide loans on stiff terms with little documentation. We suspect their market share is growing as people do more business online. And sadly many do not think through the impact of these expensive forms of capital and find themselves drowning.

Unfortunately, organizations like CEDF -- community development financial institutions -- have been established all over the nation for 25 years but they don’t get so much as mentioned.

CEDF and similar lenders fill in the gap left by the retreat of banks from the small business lending market. But it is clear from the video that while much attention goes to equity capital, the reality is that debt capital is much more common (as evidenced by the use of credit cards). We wish more small businesses would learn to use community lenders instead of the much more expensive alternatives. It’s the best set of training wheels to prove one’s company can become bankable.

-- Frederick Welk
CEDF Business Advisor

Give the customers what they want

It may seem like the oldest lesson in marketing to give customers what they want but in a litigation-filled society there's always some fearful manager (or sometimes attorney) willing to stand in the way of success.

You might have heard the story of Minnesota college student Jayson Gonzalez who stumbled into a brilliant idea of reselling Krispy Kreme donuts to hungry classmates and other donut junkies in his community by driving 500 miles round trip from St. Paul to the nearest Krispy Kreme store in Iowa. He would load 100 boxes into his car, and despite a healthy markup required to make the journey worthwhile, be became quite a popular guy. Having lived for a time in the South where the chain has most of its locations I can testify that a box of Krispy Kreme donuts should be on Schedule 1 of the Controlled Substances Act ahead of all of the dangerously addictive narcotics.

The story went national, resulting, perhaps predictably, in someone from the Krispy Kreme corporate office calling him to put a hole in his enterprise. Jayson politely complied but the social media backlash soon haunted the company. They relented and instead donated 500 boxes to help him restart the business. 

Jayson began a GoFundMe page to raise money to buy a van. His next surprise came when a freight and logistics trade magazine and Daimler AG donated the Sprinter van he needs. His GoFundMe page says he'll use the over $8,000 he has raised for taxes, insurance and snow tires.

I suppose there were some legitimate concerns at Krispy Kreme that might have involved product liability, compliance with health laws, avoiding the appearance of profiteering and such. But in the end the solution was to work through the concerns rather than diminish the very aspect that exemplified the company's fame -- a product so delicious (and a little hard to get) that people will go to outrageous lengths to get it. You can't buy advertising more effective than that.

-- Frederick Welk
CEDF Business Advisor

 

 

 

 

Small Business As Usual 19-9 -- bread saved my life

       Jennifer Acuna

We've all heard stories about how the challenges of small business ownership cause personal crises. In contrast, Jennifer Acuna, owner of Loafing Around, LLC explains the profound difference that starting a business made in getting her life back on track.

 

 

Not sure which loan or educational service meets your need?

Please give us a call toll-free at 888-835-2333 or contact us online