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Leveraging Long Term Supply Agreements to Finance additional R&D and Expansion!

One often, overlooked method of financing growth is long term supply agreements with specific unit and pricing requirements.  Once, these long term supply agreements are finalized the supplier can rely on them for planning future growth.  The supplier gets a near guaranteed revenue stream that can be used for a variety of purposes including research and development and expansion of existing facilities for growth.  The buyer in these long term supplier agreements is often, able to lock in prices and quantities that would tend to cost more in the future years of the agreements.

Thus, this is often, a win-win for the supplier and the buyer or customer.  An industry where these types of long term supply agreements are routinely used is the clean energy (wind and solar) industry.  These industries often, use a supply agreement that provides a specific mega wattage of energy on an annual basis for a specific price that is locked in over the years.  Many such buyers or customers are even able to take advantage of tax credits for purchasing and using wind or solar energy on an annual basis.  Recently, Congress extended these tax credits to 2021 for solar energy and 2019 for wind energy.

Some of the largest buyers or customers of these types of long term supply agreements are: Amazon, Google, Microsoft, Dow Chemical, 3M, Walmart, & Johnson and Johnson. These companies have collectively agreed to purchase more than 1300 in Mega Watts of energy for 2016 under these types of long term supply agreements.  The wind and solar energy industries routinely enter into these long term supply agreements for a variety of purposes.  Often, enabling R&D or expansion of their current facilities based on the existing orders and revenues from these long term supply agreements.

However, this model can be replicated by many other industries that can use these long term supply agreements as an alternative to financing via debt or additional venture capital.  Many startups and VC ventures would benefit from learning how to leverage their customers and sales by the use of long term supply agreements for R&D and expansion of existing facilities.  In some cases, these types of long term supply agreements can lead to mergers and acquisitions by the buyer or customer.  Of course, you have to negotiate good long term supply agreements and create a “win win” scenario for both the supplier and the buyer!

 

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