Preserving Equity: Financing Your Business Growth Strategically
When your business is in need of financing for growth, you often face a challenging decision: sacrificing equity or taking on costly bank loans. However, there’s a third option that can provide the necessary working capital without compromising ownership or incurring interest: customer financing.
Customer financing involves persuading your customers to prepay for your products or services, offering a cash injection to fuel your business’s expansion. This alternative is a compelling choice that allows you to avoid selling equity or burdening yourself with bank debt.
Let’s look at Brad Lorge’s success story in funding his business’s growth. In 2015, Lorge founded Premonition, a technology company specializing in logistics software for enterprise operations. Dealing with large enterprise customers meant long sales cycles and expensive implementations. To overcome these challenges, Lorge adopted a customer financing approach, convincing customers to prepay for their services.
By March 2022, Premonition’s Annual Contract Value (ACV) reached $3 million. When the company was acquired by Shippit for $20.5 million, Lorge and his partners still maintained 80% ownership due to their use of customer financing.
Customer financing is a powerful tool for business owners seeking capital without diluting equity. To implement this strategy, it’s crucial to understand your customers’ needs and motivations. Identify what benefits you can offer them in exchange for prepayment. For instance, you could guarantee delivery times in return for a project deposit or provide incentives and discounts that align with your business and customer interests.
Productising Your Service
If your business provides services, another effective approach to secure customer prepayments is by productising your service offerings. Productising involves standardizing and packaging your services as defined, repeatable products with clear scopes, prices, and deliverables. This structured approach simplifies the sales process, increases efficiency, and delivers a predictable customer experience.
By transforming your service into a product, you tap into a familiar concept of paying upfront. Customers are accustomed to paying for products before receiving them, and the same principle can be applied to productised services. Examples include website design packages, social media management plans, and content creation bundles.
Productising your services or implementing customer financing enables your business to acquire the necessary cash for growth while retaining control over equity and avoiding the constraints of hefty bank loans.
By strategically financing your business’s expansion, you can strike a balance between fueling growth and preserving ownership, setting your company on a path to success.
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