When it comes to financing your business growth, you might feel stuck between two tough choices: selling shares to raise cash, or borrowing money from a bank. Selling shares means giving up some of your valuable equity, while bank loans can be expensive and often require a personal guarantee. But there’s a third option you might not have considered: customer financing.
What is Customer Financing?
Customer financing involves convincing your customers to prepay for some or all of your product or service. This gives you the working capital you need without sacrificing ownership or taking on debt. It’s a strategy that can help you grow your business while keeping control.
Real-Life Example: Brad Lorge and Premonition
Let’s take a look at Brad Lorge, who founded Premonition in 2015. Premonition is a technology company providing logistics software to streamline delivery operations for large enterprises. While working with big businesses brought in good revenue, the purchasing decisions were slow, and implementation costs were high. Instead of seeking traditional funding, Lorge turned to his customers for financing.
He asked his customers to prepay, providing Premonition with the necessary cash flow to fund growth. By March 2022, Premonition had grown to $3 million in Annual Contract Value (ACV) and was acquired by Shippit for $20.5 million. Thanks to customer financing, Lorge and his partners retained 80% of the equity when they sold the company.
Benefits of Customer Financing
Customer financing can be a powerful tool. It helps you:
- Avoid Dilution: Keep your equity and maintain control of your business.
- Sidestep Debt: No need for personal guarantees or paying interest on loans.
- Boost Cash Flow: Get the funds you need directly from your customers.
Tips for Getting Customers to Prepay
If you’re considering customer financing, start by understanding your customer’s needs and motivations. Here are some tips to help you get started:
- Highlight Benefits: Offer guarantees like delivery times or exclusive project slots in return for a deposit.
- Provide Incentives: Offer discounts or other incentives that make prepaying attractive to your customers.
- Communicate Value: Make sure your customers understand the value they are getting by prepaying.
Productize Your Service
Another effective strategy is to productize your service. A productized service is standardized and packaged with a defined scope, price, and deliverables. Examples include website design packages, social media management plans, and content creation bundles.
The benefits of productizing your service include:
- Simplified Sales Process: Reduce the time and effort required to close a sale.
- Increased Efficiency: Minimize the need for customization, saving time and money.
- Upfront Payment: Customers are more inclined to pay upfront for a well-defined product.
- When services are packaged like products, customers expect to pay in advance, similar to buying goods at a store. This can significantly improve your cash flow without sacrificing equity.
Customer financing and productizing services are powerful strategies to fund your business growth while protecting your equity. By understanding your customers and offering them compelling reasons to prepay, you can secure the cash you need without the downsides of traditional financing methods.
For more ideas to improve cash flow and increase business value, get a FREE Digital ebook of “The Business Transition Handbook” by Amazon best-selling author, Laurie Barkman.
