Product Order Won’t Necessarily Help With Obtaining Bank Financing
Q: I am trying to start my own business and I was thinking of trying to get an order first, before I obtain bank financing, to show investors that there is real market interest in my product. If the client places an order, it will take 90 days for delivery. I will need to put up 50% of the cost of my product to my manufacturer, and they will want the balance on delivery. How do you feel about this plan?
--Judy Han, Los Angeles
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A: Getting an order is not a bad thing, because it proves there is a customer for your product. But if it’s a first-time order and you have to put 50% down, a bank would be likely to look at that as a very risky prospect. A single order to a business that has not already been operating does not necessarily imply payment upon delivery. And if the product is still in development and doesn’t turn out like it’s supposed to, the customer may not pay for it at all.
Banks that loan to small businesses look for a history of operations. It is, in effect, a regulatory condition that banks make prudent loans.
So bankers look for two ways out of every loan: The customer pays you, as agreed, when the product is due, you make a profit and pay back the loan; or you offer collateral that can be foreclosed upon so the bank is paid back in the long run.
If you own real estate, you may want to think about taking out a second mortgage on your home to provide that collateral. Some entrepreneurs draw against their credit cards to start their businesses, though I do not recommend that approach because it is outrageously expensive, and if something goes wrong it puts the entrepreneur at tremendous risk.
Having a good business plan is certainly important because it requires you to think about and strategically plan for your business and gives you a road map for anticipating and handling problems as they come up, as they always do in start-up businesses.
But simply having a business plan doesn’t carry much weight with bankers, since there is no track record behind it.
--Robert M. Franko, president, Crown American Bank, a wholly owned subsidiary of Imperial Bank
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Q: I found a company in Spain that makes great frozen paella. I have familiarized myself with the importing process, but how can I contact national chain supermarkets to sell this product? Would it be easier to get a company that distributes frozen products to include the paella?
--Raquel Burton, Long Beach
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A: It sounds like you believe in this product, which is great, but you should make sure someone else besides you acknowledges it’s a good product suited to American tastes.
I suggest you bring it to some “foodie” types, such as chefs and people in the restaurant business, and let them taste and critique it before you go forward. Does this accurately represent a paella? Is it convenient, affordable and a good value?
Once those questions are answered, test-market the product by placing it in specialty food stores such as upscale cheese shops, gourmet markets or premium wine stores, many of which have small frozen cases.
These places might take the product on a test basis, and they would be able to sell it at a good price. They would also be able to give you feedback on how the product is moving and how consumers like it. Try to arrange some sampling and public displays of the product as well.
Simultaneously with, or based on the results of, those first trials, you will need to approach specialty food wholesalers that distribute products to retailers such as major supermarket chains.
Remember that you want to make money distributing this product, the manufacturer wants to make money, the distributor wants to make money and so does the retailer. You’ll have to carefully figure out the cost of importing and packaging, the quantities the product is shipped in and other factors to ensure that this venture will be profitable for you.
Other issues to be aware of: shipping and storing the product, finding a distributor that is as sold on the product as you are and won’t let it languish at the back of a case, sampling allowances, food safety and health regulations and assessing the competition.
The fact that paella is a food identified strongly with Spain and you’re importing it from the land of its birth gives you some cachet for this product, so play it up.
You should contact the local Spanish Embassy and find out if its commercial office can offer any help. A branch of the embassy’s commercial office in New York is called Foods From Spain, and it may be able to help you with various facets of this business. You can reach it at 405 Lexington Ave., 44th floor, New York, NY 10174; (212) 661-4959.
--Robert Wemischner, co-author with Karen Karp, “Gourmet to Go: A Guide to Opening and Operating a Specialty Foods Store”
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If you have a question about how to start or operate a small business, mail it to Karen E. Klein at the Los Angeles Times, 1333 S. Mayflower Ave., Suite 100, Monrovia, CA 91016 or e-mail it to kklein6349@aol.com. Include your name, address and telephone number. The column is designed to answer questions of general interest. It should not be construed as legal advice.
