For decades, some card companies in Australia have loaned capital to newsagents in the form of cash, or fixtures or equipment items as an incentive to sign long-term agreements. Some other suppliers have done this too.
Most loans are repaid through rebates, discounts off purchases, through the term of the agreement. Some are paid off through regular, non transaction related, payments.
Card companies have used the financial assistance offer as a carrot to win new business. It has worked well for them and for newsagents who may not have been able to easily source capital elsewhere.
For years, whenever I have been asked by newsagents or someone entering the channel about tapping a card company for funding, I have said don’t do it. That remains my position today.
Supplier provided capital funding comes at a cost. Some agreements I have seen, are unfair. In one case last year, the agreement I saw had a real cost to the business way above reasonable interest rate level. It was structured to roll on as a significant handcuff to the business with the fixtures involved having a book value eight years on when they should have had zero value by then.
I appreciate there can be challenges in raising capital in small business. In my experience you are better off without supplier funding than the challenges that can come with having it.
However, if you do go down this path…
- Do your homework.
- Do not rush.
- Understand all of the documentation.
- If in doubt, get legal advice.
- If the agreement asks you to acknowledge that you have had legal advice, make sure you get it.
- Do not sign if you have any doubt whatsoever.
- Make notes of all supplier representations leading up to the signing of the agreement.
- Keep a copy of the signed agreement and your notes from the time together in one place.
- Fulfil your obligations under the agreement.
The time issues arise from supplier funding agreements small business owners are usually at their weakest. Protect yourself from this by doing the necessary legwork up front and ensuring you fully understand what you are walking into prior to signing anything.
Card companies and suppliers have not set out to get people. Circumstances have seen it look like it though. With personnel changes as they are, it is only there words on the page with your signature that matter if there is a dispute. This is why records you keep can be vital.
This is major topic as many newsagents have been taking loans against purchaser rebates for some time. Coles, Woolworths and Dick Smith of Woolworths era did it and the latter concentrated on it as an income when it turned out to be an expenditure. Unless, as stated in the blog you are aware of what you are getting into don’t. For example credits on purchases do not always relate to sales or revenue advantage.
If the loan interest free is taken with the idea of say funding expansion into more Gifts etc then the cause may excuse the loan. PROVIDING you can be assured by using your own vigilence that retail sales in cards alone are the increase that raises the wholesale equivalent. This is what gives any extra rebate to you. in other words if your wholesale rate or purchases increase and your sales don’t then you are on a downward spiral. so if you are borrowing from Peter to pay Paul and your purchases are increasing then all you have done is kicked the debt can down the road. If one defaults on these loans the penalties are severe and amounts owing, vigorously pursued.