Funding is the lifeblood of any small business. There are obvious funding sources like bank loans, credit card funding and angel investors, and you should tap these sources if you can. But if you can’t access them—due to poor credit or other reasons—you must get creative.
The good news is that funding is within the reach of most small business owners—if you know where to look. Here are five alternative funding sources you can consider accessing to grow your business.
1. Customer financing
With customer financing, current or potential customers provide funding you can use to develop or produce new products or services. The best technique is pre-selling your proposed products or services at a discount. For example, you can offer a 35-40 percent discount for pre-payment; they can pay $60 now for a product that will eventually sell for $100.
This technique is not only great for funding, but also for valuable market research. If you can’t find customers willing to pre-buy your offering, the product or service is probably not worth developing. Conversely, a positive customer response is a great indicator that you have a winner.
The potential downside here is raising too little money. For example, you need to make sure you raise enough money to build the new product or service to fulfill the promise you made to these funders. So, before seeking this type of funding, fully calculate your expenses to ensure you’ll be able to create the product or service within budget.
2. Vendor financing
As the name implies, vendor financing is when a company receives funding from one or more of its vendors or suppliers.
This form of funding was responsible for the success of shoe maker Kenneth Cole. Early on, Cole found an Italian shoe manufacturer willing to produce his shoes on consignment (Cole only had to pay the manufacturer after he sold the shoes). Without this funding, the now prominent company might not be around today.
Part of your job in raising vendor financing is to convince the vendor they should take the risk. For example, the Italian shoe manufacturer would have lost a lot of money had Cole been unable to sell the shoes. On the flip side, with Cole’s success, the vendor gained a profitable new customer. While you can never fully alleviate the vendor’s risk, consider creative agreements that give them more upside, such as signing a deal to exclusively buy from the vendor for a set period of time.
3. Peer-to-peer (P2P) lending
P2P lending is when one individual lends money to another without an intermediary such as a bank. As a result, even if you have poor credit, you may be able to access this form of funding. And, you can often get better funding terms versus working with a bank.
The two biggest P2P funding networks are Prosper and Lending Club. While the loans are structured as personal loans to the business owner, they can be used for business use. For example, small business owner and clothing designer Lara Miller has received three loans via Prosper which she used to launch her new website and clothing lines.
Likewise, you could consider taking a loan from a friend or family member. Of course, there are pros and cons to combining personal and business relationships. However, with a P2P funding network, you have a much larger number of potential lenders. Additionally, many lenders on P2P networks take a portfolio approach, lending to several people, so one of their loans defaulting may not be as devastating to them as it might to a friend or family member making just one loan.
4. Customer customization financing
Customer customization is similar to customer financing in that you ask current or potential customers to fund you. However, in this case, you seek out one large customer and create a product or service specifically for them.
For example, Scott Mitchell, co-founder of small business Learning Productions (LP), a corporate training and e-learning company, needed funding to grow his business. In his quest, he identified that Fortune 500 company Avnet was interested in a solution similar to the one he wanted to develop, which was a training software that simulated real business experiences. After presenting to Avnet, LP received over $1 million to build a customized solution. The funding also allowed LP to build a system it could then sell to other customers, and eventually sold the company to SmartForce (which later merged with SkillSoft).
5. Partner buy-in funding
Finding a business partner could be a great way to gain growth funding; that is, if the partner has their own capital or access to capital.
If you don’t know anyone who could become your partner, try contacting a local business broker. You can easily find one by querying “business broker” in any search engine, or visit Sunbelt, the world’s largest business brokerage firm. Business brokers tend to know lots of local individuals seeking to purchase and operate their own business with the requisite capital to do so.
Rather than having to own and operate 100 percent of a business, some partners may be interested in owning and operating a portion of your business. Once you get introduced to such potential partners, make sure there is a good personality fit, particularly if they want to help operate the business versus simply invest.
And remember that the ideal partner brings more to the table than just capital; they bring know-how and/or connections that can help grow the business.
Most small business owners only consider funding when they are in a cash crunch. A smarter decision is to seek funding to grow and build a stronger business. If the traditional channels aren’t working for you for whatever reason, consider these five unique funding sources.
OPEN Cardmember Dave Lavinsky is the president and co-founder of Growthink, Growthink provides products, consulting and banking services to help business owners develop business plans, raise funding and prepare their businesses for sale.