More Alternative Financing Sources

Customers That Prepay

If you have successfully demonstrated to your customers that
you deliver your merchandise to them on time, as ordered, you may be able to persuade one or more of them to put a deposit on their future orders, perhaps as much as 50%. You can add an incentive by decreasing your price a bit in exchange for the deposit. New customers can also be asked for a deposit, especially if it's a large or custom order.

Trade & Barter

Barter is probably one of the oldest forms of commerce. It is simply the exchange of goods or services for other goods, instead of using cash as the medium. The trade can be directly between the two parties or the trade can go through a barter exchange.

Don't be limited in your thinking as to what can be bartered. Approach bartering as you would any other sale or purchase. Deal with reputable companies. Don't feel you have to substantially discount your product. The barter purchase is reflected on your income statement as an expense. The barter sale (what you trade) is reflected as revenue.

Franchising

You can franchise your business to raise capital. You are selling
the rights to use your business, name practices, and methods.
You basically are selling a clone of your business and the method
to reproduce your success. In exchange you receive a cash payment
up front which can range from a few thousand dollars to substantial
amounts of money. McDonalds up front fee is over $250,000. You
also receive an on-going percentage of the franchisee's revenues.

Every kind and type of business has been franchised. If you want
to see the variety Entrepreneur Magazine has an annual issued
devoted to the top 1000 franchises.

You can retain control of how the franchisee operates, how and
what they advertise, their product quality, you can even mandate
what suppliers the franchisees must purchase from.

Franchising is complicated as there are requirements by law that
must be met. There are also certain forms and disclosures that
must be made. You can find yourself in major trouble if the
procedures aren't strictly followed. Franchising must be done
with an attorney's advice.

Licensing

Licensing is less complicated than franchising. It is primarily
selling the rights of either a product or a business name.
Fashion designers often license their name to a company that has
a product that doesn't compete but would benefit by the
association with the designer. The company sells more product,
the designer receives a percentage of those sales.

You can also license a product. You can sell exclusive rights to
a geographic area, or industry or the rights can be nonexclusive.
You can demand a minimum level of sales to maintain the licensing
agreement. Your payment can be in a lump sum, a sum of money now
and a percentage of sales throughout the time period of the
agreement, or just a percentage of sales.

Asset Sales

Selling off company assets, even a division of your company, is
a tried and true method of raising capital. You might have
equipment that's not being used, or a building and land that has
a higher value to someone else than it does to you. You can sell
off an entire product line that doesn't fit well with your
company's focus.

Consignment

If you have a retail shop and need inventory you can approach
potential vendors or suppliers to consign their products to you.
You sign an agreement that you will sell the items at the price
the vendor specifies. You do not own the items. You don't pay
the vendor until the customer buys the item. The offset is
instead of the normal keystone or 100% markup (you buy the item
for $5.00 wholesale and sell it for $10.00 retail) you only
receive a commission of between 10% to 25%. But you don't have
to use precious cash to get merchandise for your store.

Advertising Pay Per Inquiry (PPI) and Pay Per Order (PPO)


If you have a product, usually a consumer product, that requires
heavy advertising to reach customers, try to convince advertising
mediums such as magazines, newspapers, radio, and TV, to accept
payment based on the orders generated in their publications,
radio or TV broadcasts.

Let's use Metro Newspaper as an example. You place a display ad for your product that says please call 123-4567 to order or for further information. That phone number is to an answering service that tracks the number of incoming calls. The only place that particular 123-4567 phone number appears is in the
Metro Newspaper ad. For every caller (Pay Per Response) you
then pay Metro Newspaper a $1.00, or whatever the agreed to
rate is. You can also pay per order rather than per response.

You benefit because you don't have to find the cash to pay for
the ad before it runs, you pay only when it produces results.
Metro Newspaper sells space it wouldn't have and has the
opportunity to get more for that space than the regular ad
rates if it's successful.

We used a newspaper as an example but you can use the PPR or PPO with TV and radio as well. You can also use a coupon with a code on it as the response mechanism rather than a telephone number. Make sure you can track and identify the responses/orders generated by the ad placement. Usually the advertising medium will demand independent verification of the responses.

Investor Paid Advertising

No this isn't advertising for an investor. Again this works better with consumer products that require substantial advertising. You have the investor pay for the advertising and in return they receive a share of the revenues generated from the advertising. The orders have to be independently verified. Often the investor will demand that all the money generated from the orders be placed in a separate bank account, the investor's share is deducted first and the remainder sent to you. The share to the investor can be substantial from 20 to 50% of the sales generated.

Friends, Family And Yourself

This is probably the most widely used source of capital for small and start-up businesses. Any capital provided by friends, or your family, should be treated in a business like manner. If they're buying equity in your company then provide your business plan and disclose all the risks. Have them sign a
statement that says they've received the business plan and recognize this is a risky investment. If they're lending money to you personally to put in the company or lending directly to the company, have a loan agreement prepared with market rate interest and a repayment schedule. You can defer the interest for a year of make interest only payments if cash is tight.

Realize that an outside investor most likely will not recognize that debt and allow it to be paid off with funds they provide. This is especially true if you've lent your company money -- an investor most likely will not pay you off or allow the company to pay you off.

Credit Card Financing

Let's face it almost every entrepreneur has used credit cards to purchase an asset for their business or supplies when company funds were low. If your credit is good you are most likely inundated with offers of pre-approved credit cards. If there is no other way to finance your business and you like living on the edge of disaster, you can finance your company with credit card debt. Get four of five credit cards with credit limits between $3,000 to $5,000 each and you've put together a source of capital from $12,000 to $25,000. This is expensive debt with interest rates from 15% to 25%. And it's dangerous.
You've maxed out your credit lines so you have no emergency funds for your personal use. And now you have a credit card payment of between $200 to $400 a month.

Additionally, if you do get an investor interested, your credit card debt may not be recognized as a company debt. The investor will probably not allow his/her funds to be used to pay off your personal debt.

Royalty Financing

The investor buys a percentage of your company's revenues in
contrast to the more traditional method of buying a percentage of ownership in your company and therefore profits/income. The investor gets paid regardless of the profitability of the company, and gets paid first, before taxes, debt service, and interest. The investor even continues to get paid if the company declares chapter 13, a reorganization under the bankruptcy code. If there are sales the investor gets paid. This is important to keep in mind when considering this type of financing.

There can also be an equity contingency: if the company is sold or goes public, the investor may have warrants or options that allow them to purchase, at a nominal fee, shares in the company. So the investor gets the best of both worlds, a regular stream of payments based on a percentage of sales of the company and the opportunity to buy very cheaply the stock of the company
under advantageous terms.

Obviously this kind of financing is only appropriate for companies that have a high gross margin or low cost of goods sold. It's also easy to oversubscribe the company's revenues. And it can make obtaining more traditional debt financing or an equity investor much more difficult.

Brian Hill and Dee Power are authors of "Inside Secrets To
Venture Capital" John Wiley & Sons, 2001

www.InsideSecretsToVentureCapital.com

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