4.0 Other Financing

FUNDING A BUSINESS >> Each section contains key Action Items located within the downloadable Action Guide >> Click to Download Action Guide.

4.1    Customer Financing

  • Current or potential customers provide capital that can be used to develop or produce products and/or otherwise fund your growth

Why?

  • They know you
  • They believe in your vision
  • They see the potential upside in fronting you capital now

Working creatively with customers can significantly improve the cash flow for your business.

One of the best examples of working with customers to increase cash flow is to have customers “pre-pay” for the entire cost of the product or service that they purchase.

Depending on your production time frame and product inventory, the pre-payment method can enable your business to gather orders and use the money collected to pay for the first production of your product.

Additionally, many businesses require a 50% deposit on orders and full payment upon shipment or fulfillment of the order.  This helps to provide needed cash flow and protect your organization from payment disputes.

Building “expectations” with your customers is the key to a good relationship.  If your customer terms are clearly established in writing before beginning a relationship, the customer will expect to pay in advance.

Financial terms can always be negotiable with customers.

Consider providing a special “quantity discount” if the customer orders and provides payment in advance for larger quantities than they currently need.  Shipment of the product could be carried out over a six month period enabling your organization to record a larger “up front” sale, which provides additional revenue and cash flow for your business.

In the bootstrapping section above, David Meadows was able to change the customer’s “buy-back” product policy terms to a “no buy-back” for an additional discount off the price of the product.  Once Meadows sold his product to the large retail chain, he did not have to worry about buying back product (inventory) that had not been sold in their stores.

You have the ability to be creative with your customers.

How can you build a win-win relationship with your customers to put cash in your pocket right now?

ACTION ITEMS: Complete the Action Items in your Action Guide.

WRITE down three ways that customer financing could work for your organization.

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4.2    Supplier / Vendor Financing

  • Occurs when a company receives capital from one of its vendors or suppliers
  • Can be trade credit
  • Sometimes interest-free or equity-based financing

There are numerous creative ways to work with suppliers and vendors to help finance your business and it’s up to you to imagine and present options to them.

If you have chosen to rent office space, which is one of the biggest drains on startup capital, you may be able to negotiate six months of free rent with a longer contract.

If you have leased any equipment, automobiles, technology or other items, work with your leasing company to get favorable terms during the first six to twelve months of your startup.

In the bootstrapping section above, David Meadows was able to arrange a small deposit and extended payback period for the goods produced by his supplier.

Large and small suppliers will have different levels of flexibility and you may consider researching their flexibility before presenting your interests to them.  Researching your potential supplier may also provide knowledge that you should consider prior to making your decision to work with them.

If your business will focus on a certain region or market, you might be able to locate other distributors outside of your market to learn more about the supplier.  Simply search other states for distributors or call the supplier anonymously to get a list of distributors.

When calling other distributors, you can simply say, “Hi Mr./Mrs.______, my name is _______  ________ and I understand you are a distributor for __________ (supplier).  I’m looking at becoming a distributor in another state and I wanted to find out if I might be able to ask you a few questions to learn more about _______ (supplier).  Could I ask you a few questions right now or would it be better to schedule a brief call with you?”

A few questions that you may consider:

  • How long have you worked with the supplier?
  • Have you been happy with the supplier?
  • Would you like to see the supplier improve in any way?
  • Have you been happy with the supplier’s credit terms?
  • Has the supplier ever shown flexibility in their credit terms?
  • Are there certain lessons that you have learned from working with the supplier?
  • Are there any other suppliers that you might suggest I research for my region or market?

As you uncover more information about your potential supplier, you might learn important details from other distributors that may help in your supplier selection process.  Furthermore, you may uncover other ways that distributors have been able to work with the supplier.

It’s now up to you to creatively present options to your supplier that can provide a win-win outcome.

If you’re dealing with a customer service or sales representative, they may not have the ability to negotiate financial terms on behalf of their company.  So, you can start by building your relationship with them, but you’ll want to build a relationship with the decision maker.

This is where it can get a little complicated.  You don’t want your customer service or sales representative to think that you are “going over their head” to talk with someone more senior in their organization.

It’s always easier to start at the top of an organization and work your way down the staffing hierarchy.  If you haven’t yet established a relationship with anyone in the company, then write a note to the President or CEO and express your interest in becoming a distributor.

The CEO will most likely refer you to someone else in the organization, however, when the CEO asks an employee to work with a new distributor or customer, the employee will make every best effort since it was the CEO that asked the employee to handle the new distributor.

If you have already established your relationship with a customer service or sales representative, they usually will not feel threatened if you ask to be introduced to the CFO or Chief Financial Officer to request special credit terms.  Very rarely do CFO’s receive a nice letter or note from customers or distributors and besides the CEO, the CFO will be the final decision maker for special credit terms.

In each of the situations above, you’ll want to convey confidence in your ability to sell the supplier’s product, so that they have a true interest in working with you, especially on favorable terms.

You may consider asking for longer repayment terms such as 60 or 90 days in the first six to twelve months while you get your business off the ground.

On occasion, you may be able to convince your supplier to create a loan to your organization in exchange for providing product to your company.  In other words, they may ship product for you to sell to your customers, but you can arrange a payment plan over a three to twelve month period.

Another option to reduce early cash requirements is to have the supplier invoice your customers directly, therefore enabling your organization to focus only on sales and marketing rather than billing and receivables.  This option could have the potential to improve your cash flow since your company will not have to pay for the supplier’s product before receiving the customer’s payment for the product.

You may be able to convince the supplier to pay you a commission when the sale is completed or shipped rather than having to wait for payment to be received by the customer.  In this case, the supplier will require you to pay back the commission if the customer fails to make payment for the products.

You’ll want to have a written agreement with your supplier and negotiate favorable and expedient payment terms to you.  You’ll also want to make sure that your agreement with the supplier identifies each of your customers by name, so that the customers will always be “owned” by your company in case you choose to change suppliers in the future.

Suppliers and vendors may consider an investment in your business and that’s where you must determine if you’ll always want to carry their “exclusive” product.  This may not be a good option if you plan to expand your business to offer products and services beyond those of the initial supplier.  However, an investment from your supplier could form a great partnership and get your company off the ground with a limited upfront financial investment.

Remember, it’s up to you to be creative and ask for special considerations.  You will not create any special arrangements without asking for special treatment.

ACTION ITEMS: Complete the Action Items in your Action Guide.

THINK creatively and write down a few ideas on how you can work with your supplier(s).

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4.3    Grants, Awards & Competitions

  • Primary source of grants is the federal government, but many foundations such as the American Cancer Society also provide grants. Grants provide over $1 billion in funding to companies each year
  • 26 federal grant-making agencies such as the Department of Homeland Security, the National Endowment for the Arts and the Department of Defense
  • Competitions and awards are also great sources of free capital from which great companies have been born

Government funding is hard to find, very specialized, may require lengthy applications and have a long processing time before receiving any funds.

Save time by enlisting a college intern to research government grant opportunities for you.

Small Business Innovation Research (SBIR) – www.sba.gov

Catalog of Federal Domestic Assistance – www.cfda.gov

Grants.gov (find and apply for federal grants) – www.grants.gov

Cooperative Research and Development Agreement (CRADA)

Google “CRADA” with your “subject” or business topic (example:  “CRADA internet”)

http://www.usgs.gov/tech-transfer/what-crada.html

http://www.fda.gov (Search CRADA in the FDA’s search field for partnership examples)

ACTION ITEMS: Complete the Action Items in your Action Guide.

VISIT and learn more about the sites above.

4.4    Business Incubators

Business Incubators can be considered an “apartment” for startups.

There are numerous incubators throughout the nation that provide shared office settings including secretarial and administrative services, telephone answering, copying services and even advisory services from seasoned entrepreneurs and mentors.

Research the National Business Incubation Association at www.nbia.org to learn more.

ACTION ITEMS: Complete the Action Items in your Action Guide.

VISIT the National Business incubation Association at www.nbia.org to learn more. You can try contacting the business development departments of your local government and colleges for information.

LIST the nearest incubators in your area: Include name of site, contacts, and contact information.

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4.5    Small Business Investment Company (SBIC) Programs

The Small Business Investment Company (SBIC) Program is a unique public/private partnership that has provided $55 billion in financing to more than 106,000 small U.S. companies since the program’s creation in 1958.  SBICs are privately organized and managed venture capital firms licensed by the U.S. Small Business Administration (SBA) to make equity capital or long-term loans available to small companies.  These small companies often require financing in the critical $250,000 to $5 million range that is generally not available through banks or non-SBIC private equity firms.  SBICs fill that gap, supporting thousands of U.S. small businesses each year.

Search for an SBIC in your area by visiting www.nasbic.org and click on “Find an SBIC.”

Also visit www.naicvc.com.

The National Association of Investment Companies (NAIC) is the industry association for private equity firms that invest in an ethnically diverse marketplace. NAIC member companies invest in privately held businesses that have a high probability of growth and the ability to generate significant returns for investors and shareholders.

ACTION ITEMS: Complete the Action Items in your Action Guide.

SEARCH for an SBIC in your area by visiting www.nasbic.org and click on “Find an SBIC.”

VISIT www.naicvc.com to learn more.

WRITE what you learned.

4.6    Factoring

  • Factoring is the sale of accounts receivable invoices to a third party
  • Positive: can often quickly get funds
  • Negative: expensive way to finance accounts receivables

4.7    Convertible Notes

  • A hybrid of debt and equity known as convertible notes

Do you plan to have angel investors and venture capital as you grow your company?

Preserve your ownership equity with a little known secret called a “convertible bridge note.”

This is a loan with a favorable interest rate and a “sweetener” that provides an extra incentive when the investor’s money is converted into equity at the “institutional” round.

This method preserves value for the entrepreneur by not providing equity in the company to early investors until the company has experienced further growth and built additional value.

For instance, investors participating in a convertible bridge note will not have equity in your company until a venture capital firm (institutional round) sets a “per share” equity value on your company.  Until then, the convertible bridge note holders will have a loan with a favorable interest rate.  When the venture capital money is raised, the original investor’s money will get converted into equity in the company.

As a sweetener example, the investor’s money may get converted into shares with the original investment amount plus a 25% percent additional bonus equity amount.  Therefore, $1.00 invested in this example would actually become a $1.25 when the investor’s cash investment gets converted into “per share” equity in the company.

An experienced CPA can research the convertible bridge note for you.

ACTION ITEMS: Complete the Action Items in your Action Guide.

SCHEDULE a time to meet with an experienced CPA to discuss the potential of a convertible bridge note.

Next – Go to 5.0 Private Equity »