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Last Update: Thursday September 23, 2021

Key Idea: Finance Without A Bank

There are no business startup bank loans.  Every founder who wins money from a banker to get going had personal assets to use as collateral.  Or, they might have been lucky to convince a friend or family member to co-sign on a loan.  Laurie Synder, founder of Flap Happy, had to look beyond banks to make her darling hats. More...

Key Question:


Laruie turned to customers, then tightened her own belt.

When she won her first big order, Laurie was honest and said that she needed the customer to be pay at least 50% of the invoice up front.  Ping Golf, the largest manufacturer of putters in the world, has always collected for the whole order in advance of its production!

Q: Why doesn't everybody collect up front from customers?

A: Good question. Typically, retailers purchase products, often using borrowed money, to stock their shelves. Many industries depend upon the good faith of customers meaning they don't collect fully until the customer is satisfied. Think hotels and restaurants.

Doug Hawken, president of Ping, explained that they collect up front at the time of the order because that's what they have always done. Therefore, they do it because they can. Customers don't balk. The lesson in this for everyone is: If you have an excellent product or service, you can demand full payment in advance. Period. We feel sorry for service providers who get stiffed or have poor cash flow, but it is time to change your business practices. Be bold.

To raise money you might be about to find a supplier who wants you to succeed. TiresPlus financed its growth by plowing the earnings of the business back into expansion and by borrowing from suppliers. At first, this was by necessity, as the banks would not lend to TiresPlus because of Tom's lack of experience. Later, it was a conscious decision.

  Why would a bank, which is in the business of lending money, not loan money to Tom and Don, and yet a tire company, which is in the business of manufacturing tires, would?

  This is a classic risk-reward analysis for both the bank and the tire manufacturer. We all know banks are conservative lenders. They take no equity position in their customers' businesses so their money is cheaper for you than venture capital or going public. Cheaper for you means a lower return for them, and a lower return means they are not willing to enter into high-risk deals. Any banker with a crystal ball would have leapt at the opportunity to finance the growth of TiresPlus, but unfortunately, success is difficult to predict. For the most part, bankers don't finance start-up operations. When they do, it's because they see a strong secondary source of repayment, such as the personal guarantee of a high net worth individual with a clear capacity to repay the loan if the business fails.

Let's look at the risk-reward relationship from the tire manufacturer's point of view. Supplier financing is more common than you might expect. The reward to the vendor is substantial, a growing, successful customer (you!) buys more than a smaller one. The risk to the supplier is actually less than we might first think. Remember, the supplier is getting the margin on the inventory you purchase. Every dollar of profit the supplier earns on your account further mitigates any potential loss on the loan made to your business. Suppliers generally evaluate customer financing opportunities in terms of the "payback period", i.e., how long it will take to eliminate the possibility of any loss on the loan. This period is generally substantially shorter than the period over which the loan is repaid.

Let's look at a specific example: A retail customer wants to borrow $100,000 from a manufacturing supplier to open a 2nd store. The customer currently purchases $10,000 per month from the manufacturer; this amount will double with the second location. The customer is willing to repay the principal of the loan over a five year period. The manufacturer's gross profit is 20%.

At the end of the first year, the customer will have repaid $20,000 on the loan and purchased an additional $120,000 of inventory, providing the manufacturer with an additional $24,000 of gross profit or a total payback of $44,000. The entire payback period is just a little over 2 years, rather than the five year period of the note.

Rarely are suppliers motivated by the actual return on the investment, i.e., the interest on the loan. They are much more interested in the customer relationship and its growth potential. There is also some concern that if they don't make this financing available to you, one of their own competitors will. If you go elsewhere, the current profit associated with their relationship with you is at risk.

Q:  What did Laurie do to keep cash in the business for the first four years of operation?

A:  She did not pay herself.   This is shocking to people who have a paycheck but not to us.  We know Joe Dannis, founder of Dawn Sign Press, who did not pay himself for seven years.  Then there is our hero, Albert Black , who worked a full-time job while running his business full-time (yes, eighty-hour work weeks) for ten years.  He even used the money he received in his paycheck to pay his employees. 

Q: How does a business owner minimize the expenses of the business that requires a cash outlay?

Two ways: reduction and elimination. There are some things that you just have to have, but the cost of getting them can be minimized:

  • Comparison shop, including shopping online.
  • Take into account any taxes and/or shipping and handling fees so you know you are making an apples-to-apples comparison.
  • Look for generic brands that don't have the manufacturer's marketing cost built into the price but will serve you just as well.
  • Buy only the quality that you need and in minimal quantities.
  • Eliminate any costs of service you can by performing the service yourself or asking a family member to do it.
  • Accounting and janitorial services are the most commonly done by family members of business owners of start-up companies, but there are a myriad of administrative tasks that need to be done that family members can help with.

Think about it

What unconventional sources of capital are available to you to finance the startup and the growth of your business? (Hint: Who makes money if you make money?)  What do you need to change in your collection process that will increase your cash flow?

Clip from: Flap Happy started by manufacturing hats!

Hattie encourages us all,  "Set Profit-Margin Goals."

Santa Monica: In this episode of the television show we take you inside a California business that is making children's hats for Talbots, Nordstrom, Children's Wear Digest and dozens of others. Now they make hundreds of items for retailers (mostly small children's specialty retailers) all around the world.

Laurie Snyder started Flap Happy because she was afraid her very fair-skinned, freckled-faced baby boy would get seriously burned by the California sun. Laurie created a hat by enlarging the brim of a traditional baseball cap and by adding flaps. Other mothers saw the hat and wanted one for their own child.  That was the beginning of this special business.

Meet Laurie Snyder. Meet her Mom, her Dad, her husband, her sister, her "model" child and her other children, too. This is the team that sacrificed to build the business.

Go to all the Key Ideas and video of this episode...

Flap Happy, Inc.

Laurie Snyder, Founder / CEO

2330 Michigan Avenue
Santa Monica, CA 90404

Visit our web site:

Office: 310-453-3527

Business Classification:

Year Founded: 1987

Finance Without A Bank

HATTIE: You started from zero.

LAURIE: From nothing. The only thing I had was the hat from New Zealand, and from there I just had to use common sense. The biggest thing is not being afraid to take a risk. In starting a business, you have to be willing to take that risk to succeed.

HATTIE: Now Laurie's company, called Flap Happy, has 18 employees and will see $3.5 million in sales this year.

LAURIE: Customerwise, what I did is I, as a Mom, received a lot of mail-order catalogs, and so I picked one out that I really liked and I mailed them a sample and a little letter saying, you know, `I think you'd really like this product.' And they actually called me and ordered 20 dozen hats, which, at the time was huge, and it was very exciting.

But the next problem was, how do I pay for this? I have to produce this. So I asked them if they could give me a 50 percent down payment, which they did, and that financed the first cut. And in the meantime I had to figure out, in a very short period of time, since I had this order, while I had the old product, but I now had to develop my own product.

So I put my son in a backpack and went downtown and walked into sewing shops and said, `I need to make this. Can you make this?' And they said, `Well, who's going cut it?' And I said, `You don't do everything?' And I had a lot to learn in a short period of time, so I had to go find the fabric and put it all together. I ended up delivering that first order about six to eight weeks late. They were totally fine with that, and they came back up with a 100-dozen order and, again, gave me 50 percent up front, and I was on my way.

HATTIE: And the first year, of course, you didn't take any income because there wasn't any?

LAURIE: In the first four years we took no income. I didn't pay myself anything. So I was very lucky that my husband had a good job and he enjoyed what he was doing.

HATTIE: But how did you keep yourself motivated through that? I mean, it's like you're working really hard, long hours and trying to create this. Didn't it get discouraging a little bit?

LAURIE: It was very exciting. People's responses to the product kept me going. Getting pictures in the mail -- from parents that were very satisfied -- of their adorable little kids wearing our products. They sent us ideas. And it was so exciting that there was no time to think about it. That's what propelled me to keep going. I used credit cards. I'd cash advanced my credit cards, and I had to feel very sure of what I was doing in order to do that. And that's what financed the first fabrics, the first patterns, the first cutters, etc.

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