New and Disruptive Methods of Financing
We all know that new strategies and technologies such as the internet, social media, Smartphones, and major online retailers are rapidly disrupting organizations. However, financing and the financial industry have been very slow to adapt. The purpose of this article is to recommend a number of tactics to take advantage of new (and sometimes disruptive) financing opportunities. At the Startup Connection (www.startupconnection.net), we believe that a very important (but often overlooked) opportunity is that operating and marketing processes should also be viewed as financing tools.
We still mostly live with an old world of small business financing. Most financing (including institutions like banks and the SBA) are based on antiquated businesses, such as manufacturing and retailing. In the old business model, you quit your job, built a building, bought inventory, hired lots of people, paid high interest rates, gave away lots of equity, and then waited 1-2 years to make any money. This was financed through asset loans, guaranteeing debt with family assets and your own savings.
Fortunately, the reality today is very different. Most new business are service or technology businesses, and they require much less investment. Another very important factor is that you can now quit your job much closer to actually starting the business.
The biggest changes may be finding marketing opportunities to accelerate growth and using techniques to minimize financing needs. At the Startup Connection, we recommend a more comprehensive and flexible approach to the process. This approach puts a slightly different perspective on key issues, such as: How much money do you need? How and when will you pay it back? Why should someone invest or partner with you?
Many clients start the entrepreneurial process asking the age-old question, “How do I raise money?” I argue that is the old way to start, and this mindset needs to be changed to be more successful. Old style advisors often recommend raising as much money as possible. In contrast, I believe in minimizing to reduce costs and risk, and to keep equity and avoid excessive financing charges.
There are other new perspectives to financing your business. We live in an environment with low interest and inflation rates, and lots of capital to invest. This article identifies financing suggestions, organized into operational, marketing, new, and traditional methods.
Operational Financial Resources
The simplest source of funds is to reduce the need for funds through regular business tactics. This can be accomplished with strategies of outsourcing, contracting services, using sharing resources, and testing. While not all of these strategies may be appropriate for every business, consider the ones that have most potential to save cash:
- Use services for internet management, warehousing, and programming,
- Plan and manage inventory to maximize return: focus on the 80-20 % rule that 80 % of your sales will come from 20 % of your products. In addition, manage inventory and services for seasonal and market changes.
- Minimize investment through strategies like renting or sharing. For example, warehouses, cooking facilities, and manufacturing can all be outsourced. One caution: doing things in of your home has long term, operational and frequently legal implications.
- If asked, suppliers are frequently willing to help a business through things like financing, holding inventory, reducing production times, and shipping direct.
- Consider direct shipping from your facilities, or organizations like Amazon.
- Understand and minimize complexity. For example, there is a big difference between selling a shoe (with various sizes, colors, widths and styles) versus selling food products (that have a few ingredients that can made into a number of items.)
- Analyze why you are really spending and what you will get from it.
- If the business is profitable and growing, you can frequently finance the growth with working capital from profits. This also means giving up less equity.
Expanding Marketing Efforts
Don’t wait for business to come to you but consider the rule: you have to spend money to make money. Analytics, internet marketing, and outsourcing programs provide numerous opportunities to grow and make money faster:
- A website and simple marketing statement provides basic information for potential customers. These can be inexpensive through programming tools like WordPress.
- Amazon is the fastest growing retailer in the country and controls about 30-50% of most category internet sales. It is easy to set up and relatively inexpensive.
- Paid search through organizations like Google and Facebook are underestimated. These options can be inexpensive and fast, and the results can be measured.
- There is nothing as productive as Networking, Networking, Networking!
- These tactics need to be tested and measured. Kill or modify the ones that fail and expand the ones that succeed.
Non-traditional Sources of Financing
Crowdfunding was initially used by “social entrepreneurs” to fund their projects, films, books, and social ventures. It consists of offering to small investors in your business, through organizations like KickStarter.- While credit card interest can accrue (at a high interest rate) if not paid off right away, some credit cards do offer a startup business a 30-day free program, or zero interest (for sometimes up to 18 months) with a new account.
- Bartering, alliances and exchanges are viable methods to get both excellent services and save cash.
- Community based lenders (such as non-profit, independently financed, or private organizations) often make loans to small businesses or entrepreneurs who do not qualify for traditional commercial bank loans.
Traditional Sources of Financing
- Equity from yourself, friends and family. This is the amount of money you can put into the business on your own, and you don’t have to pay it back until you see profits. It can come from a variety of forms and can include sweat equity and contributed assets. It also provides other investors with more confidence in your commitment
- Outside equity had the same properties, except it involves giving up at least some equity in the company. It can come from a variety of places like partners, venture capitalists, private equity dealers, private offerings, and private investors.
- Traditional banks and loan institutions are focused on reducing risk and making certain they get paid back. These are usually asset-based loans or combined with equity contributions.
Raising financing is a two-way street that requires honesty, understanding and communication. Understand your needs and risks to find the right kind and type of investors. Don’t overestimate your potential or what is needed to meet your goals. Develop plans, measure results, and satisfy investor requirements.
Dr. Bert Shlensky has an MBA and a PhD from the Sloan School of Management at MIT. He is the President of the New York-based consulting firm The Startup Connection, where he uses his 30 years of high-level business experience to guide his clients towards maximum sales and profit. For a free consultation, please visit www.startupconnection.net.