Creative Business Financing

Customers

This may seem an unlikely source of business financing, but it is much more common than you might think. Following is an actual case history of how this can work:

I had a customer come to my company and ask if we could develop some special tooling to be used by them in their manufacturing process…there was nothing similar available in their industry at the time. This customer advanced the cost of development and prototyping in exchange for a 6-month exclusive right to the product after we began manufacturing the tooling.

The prototypes were successful; we patented the tooling concept, and set up a small manufacturing department—paid for by the customer we had the agreement with.

After the 6-month exclusive agreement expired, we formed a new spin-off company, expanded our sales effort worldwide, and the new company became highly successful…with the business startup cost paid for by the original customer.

The key to customer financing is to have something they want and need, and then simply asking them how they can participate in the upfront financing of fulfilling that need. It's a little more difficult before you actually start your business, but if your new business could fulfill a strong need, you still might be able to put a deal together.

Vendors

This form of creative business financing is common if you are just looking for extended terms on something you are buying, or need to buy, from vendors, such as: inventory of parts or products. But, if you are developing a new product or service you also may be able to obtain some development financing from a vendor who stands to gain substantially when your product goes to market.

This can be done as a loan, which is the simplest way, or you can pledge stock against the advance—or any of several similar scenarios. When you have two willing businesses, there is always some way to make it work. Just ask, because this is not something vendors will usually seek you out for.

Employees

If your business currently has employees, and you need money for expansion or new product development, you might be able to joint venture with your employees to finance the startup costs. The potential rewards need to be substantial however, because employees are not entrepreneurs, and they rarely have extra money to spare.

So, if you do joint venture with your employees, make it real—this cannot be just a token attempt, or you will lose the trust and respect of your current employees plus everyone who comes to work for you in the future.

Peer-to-peer Lending

This form of business lending has become more popular the last couple of years. It allows you to borrow a modest amount online—usually up to about $25,000 (although it can go higher)—from a willing private lender (or multiple lenders) by going through a brokerage service. The terms of the loan can be surprisingly low, depending on your credit score and the program you use, but you don't always need to have a real high score to participate.

Here are some current websites for Peer-to-Peer Lenders (Links open in new window):

• Prosper
  Prosper claims to be the largest peer-to-peer lender in the world, with 1,120,000 people involved in their program. The process is straightforward and easy for anyone to do—just make sure your pitch (custom loan listing) follows their guidelines and is the best you can provide--this is where you "sell" your project. Click here to access their website.
• Peer Lending Network
  The Peer Lending Network is an affiliate of Prosper.com, but works a little differently. Instead of interest rates being set by PLN, people looking for a loan post a listing for a peer loan with the amount they need at a rate they can afford, and lenders bid on the listings by bidding the amount and rate they are willing to lend the borrower. Click here for more information.
• Lending Club
  Lending Club has about 32,000 borrowers and around 50,000 individual investors in their program. They have surpassed $325 million in loan originations with an average loan size of about $10,000. For more information on the Lending Club, click here.
• GoBig Network
  This lender operates similarly to the other peer-to-peer lenders, except they deal in much larger investment amounts, and appeal to larger investment firms. That also means you will need a very professional "Business Plan," because you are asking for larger investments from professional investors. For more information on this company, click here.
• Zopa
  Zopa was the world's first peer-to-peer lending company when it launched in the UK in 2005. Most p2p companies since then have emulated Zopa's platform.

  Unfortunately, Zopa does not currently operate in the U.S. and can only be used by those who are residents of the United Kingdom. To find out more about the UK service, click here.

Crowdfunding

This type of funding is actually a "contribution" instead of a loan or investment. It is used primarily for "creative" projects or some very unique type of business. For more detailed information on Crowdfunding, review this blog post. You can also access the following Crowdfunding websites (Links open in new window):

• Kickstarter
  Kickstarter claims to be the largest funding platform for creative projects in the world. They specialize in raising money for a variety of projects from the worlds of music, film, art, technology, design, food, publishing and other creative fields. For more information, click here.
• Peerbackers
  This platform is a little different from some of the other crowdfunding platforms in that if you do not meet your target pledge amount, you can still take whatever money has been pledged, IF you can deliver the rewards you promised in your post. Otherwise, the monies are returned to the contributors. For more information on this company, click here.
• Make.Shift
  One of the most notable examples of this source of financial support is an organization based in Bellingham, Washington called Make.Shift. This non-profit organization provides space for music groups to practice and perform, and they are now expanding to include entrepreneurial people involved in the visual arts. They just recently obtained a vacant facility in downtown Bellingham, and are in the process of remodeling it to accommodate their members. They have an unusually unique way of supporting the creative arts that can be replicated to any community in the world.

Factoring

If you have already started your business and are selling your product(s) or service on terms, you can quickly "sell' your invoices to a "factoring" company to get immediate cash instead of waiting for the customers to pay. Just be aware that factoring companies charge an exorbitant fee, so this should be one of your last resorts for money.

Hard-Money Lenders

This should be the absolute last-ditch effort at creative business financing. Hard-money loans are aptly named because the lender is usually a private individual, or small group of individuals who loan on sure things, charge exorbitant interest, require substantial collateral, and want their money repaid fairly quickly.

This form of financing is not usually appropriate for financing startups, but it can be highly valuable if you only need a short-term bridge loan for your business expansion, or new product release. Just be sure you do your research thoroughly and know whom you are dealing with—sometimes there is a fine line between an honest hard-money lender, and a shyster. To find a hard-money lender in your area, I recommend you work through your banker or advisory board.

Community

This is a rare form of creative business financing, but it can happen, where an entire community wants you to start your business there—or keep your existing business operating there. Numerous incentives are usually offered (common), and sometimes financial investments are made (not so common).

This also requires a great deal of research and negotiation if you are just starting up, and you will also have the entire community looking over your shoulder as you set up and run your business. Work through your banker, advisory board, business development agency, or a city council member who publicly supports new business in your community.

Leasing vs. Buying

If your new business requires equipment, furniture, or fixtures, something you should strongly consider is leasing rather than buying. There are numerous advantages in leasing, not the least of which is the preservation of cash. For a more complete discussion on the advantages of leasing, check out the details at Benefits of Leasing. (Opens in new window.)

Think Smaller

This is a pretty old-fashioned way to start a business, but probably more successful businesses started out this way than any other. By “think smaller,” I am referring to the entrepreneur who has a big dream, but little money, so they start a small unrelated business, build it up to profitability and then sells it.

The entrepreneur then uses that money to start another unrelated smaller business…and repeats the process as many times as necessary until they have the money to start their dream business.

Not only will this approach give you the money to start your dream business, but a couple of small business successes will go a long way with future partners, investors or Venture Capitalists.

Other Avenues

Here are a few other possibilities for creative business financing. It will take some digging around to see what is available in your area, but it may be well worth it:

• Grants (from government and foundations)
• Microloans (for the smallest businesses)
• Prizes for business plan competitions
• Economic Development Centers
• Small Business Development Centers

Well, there you have a few creative business financing methods to consider. When your business cannot raise money through more conventional channels, creative business financing may be your only alternative.

This also means you will have to be even better prepared than with conventional financing, and you will likely need to prepare a different kind of business plan for each source of financing (depending on their requirements).

In the event you still cannot finance your business through creative business financing, there is one more avenue available to you to get your business started…Bootstrapping! To access a complete report on "bootstrapping," click here.