Distributor Makes the Buyers Its Lenders
How do you grow a business without outside capital?
To many business owners, the search for outside financing proves so frustrating that they simply give up. Unable to get a bank loan or to find backing from an angel investor or private equity group, they throw up their hands and turn to tasks more immediately productive.
Clearly, not every business gets the outside financing it needs to grow; indeed, many solid companies go begging for help year after year, and the frustration their owners feel is acute. But it does not follow that if you can’t find outside help, you can’t grow your business--because not every business needs outside help to grow.
Some grow by making the most of the advantages they enjoy, however slight they seem, with or without outside help--as Keith Vallely and his two partners, Steve Milburn and Julian Anderson, did in growing their Redondo Beach start-up, International Fulfillment Services, a wholesale distributor of computer supplies and accessories, many of them gray-market items.
Founded in April 1998 with $14,000 in seed money from the pockets of the partners themselves, IFS did $3.7 million in revenues in its first eight months and may hit $9 million by the end of this year.
Big numbers, of course, don’t mean big margins; in fact, IFS operates on very thin margins, forcing the partners to wring everything they can from the capital they have.
How do they do it? Among other things, they manage cash flow effectively, and they work the fluctuations in the world currency markets to their advantage--and in order to see what all that means, you start with the basics of their rough-and-tumble business.
People associate gray-market goods with shady doings, and Vallely and his partners are sensitive to that fact. They operate in the U.S. and 16 other countries. The goods they buy and sell are perfectly legal, although they don’t travel the ordinary channels from manufacturer to distributor or wholesaler to retailer to customer.
Using computers, telephones and fax machines, Vallely and his partners scour the world every day, buying items such as printer and copier supplies from sellers in one place and shipping them to buyers in another--and making a profit if they buy low and sell high.
On a Monday, for example, they may buy a load of toner cartridges from a wholesaler in Japan with a customer in Singapore who has canceled the order at the last minute. Vallely and his partners offer the toner to other wholesalers elsewhere in the world, seeking one who will buy at the right price.
An economist would call Vallely and his partners middlemen who seek out brief imbalances in supply and demand around the world and clear the marketplace of items that unexpectedly become excess goods.
Buying low and selling high, however, is only one of the keys to what they do. The partners also manage their accounts payable and receivable in a special way, often collecting from their buyers before they pay their sellers. In essence, the strategy makes their buyers their lenders, giving the partners a big advantage.
It’s a neat trick, of course, and not available to every business. The point, however, is not that Vallely and his partners enjoy a unique advantage, but rather that they see opportunity and make the most of it.
“Let’s say I have a seller in Asia and a buyer in the American Midwest who agrees to pay 10 days after receipt,” Vallely says. “The goods arrive in Los Angeles by air and we ship them to the Midwest by truck.
“My Midwest buyer pays me by wire on the 10th day, and if I have 30-day terms with my Asian seller, that gives me 20 days to use the cash to do more buying and selling someplace else.”
Vallely gets his buyers to pay rapidly by offering them discounts of as much as 10%. Vallely’s sellers, meanwhile, would prefer shorter terms, but they also have excess goods to unload--and in the balance between the needs of buyers and sellers, Vallely gains IFS a stream of unencumbered cash to use as working capital.
IFS also profits by taking advantage of currency fluctuations. The partners know that manufacturers may want to take their profits in yen today, for example, or in francs tomorrow, depending on exchange rates and business conditions, and that this creates short-term gluts or shortages of goods on any day of the week in different parts of the world.
IFS clears the market of these imbalances--and as you might imagine, the company does not endear itself to the manufacturers of the goods it buys and sells.
“Wholesalers like us because we provide an important service,” Vallely says, “but manufacturers hate us because we supply their goods at prices the manufacturers often can’t meet.”
Given the rough-and-tumble nature of the business, trust is crucial to every transaction, Vallely says; he and his partners deal only with buyers and sellers who will perform, and they make sure that they themselves do so, too.
“This is a handshake business, and we have to do what we say we’ll do,” Vallely says. “That doesn’t mean you can’t be wrong once in a while, so long as you let everybody know what’s up.
“If there’s a glut of something in one country and a shortage in another, we can rectify the problem faster than the manufacturer can working through normal channels--a lot of times at a cheaper price. We’re the equalizers of the marketplace.”
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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
