I have another way for you to get money for your business without borrowing or taking on difficult money partners.
We already talked about getting customers to prepay, but for now, I want to discuss another killer method.
It starts with a Latin phrase "cui bono," which means "who benefits."
As I always say, the best people to borrow from are customers. They benefit directly from your service or product, so they are most likely to prepay. And getting prepayment keeps you realistic because you quickly find out what the customers are willing to buy and what they are merely "interested" in.
(If I had a dime for every salesman working for me who came back from a call saying, "they're really interested," I'd make Howard Hughes, Bill Gates and Warren Buffet look poor. But that's another article.)
Money from your suppliers
The next best place to find money is from your suppliers. By asking "who benefits?" you can make a very nice list of suppliers who will benefit from your success.
For example, let's say you are starting an Internet dating service. You’re going to work in your local city and generate business from bar and club owners.
Make a list of the vendors and services you need. It could include website development, website hosting and brochure printing.
With this list you can approach these businesses and pitch them on helping you.
Don't ask them to invest. Say: "I have a startup that’s a dating service here in Anytown. There’s a huge need for this, and I’m partnering with Joe's Bar and Tina's Club. They have agreed to help me get customers. Now I need a website developer."
Explain that you’d like them to do work for you financed with an interest-free loan. You’ll pay them in 90 days out of cash flow in return for their services. If you don't succeed, you don’t owe them anything. If you do succeed, you’ll become their most loyal customer.
You may run into a lot of people who turn you down. But you’ll get some to agree as well. I’ve had printers print thousands of books purely on this basis, with the agreement that if I couldn't sell them I owed them nothing. And I've had people construct prototypes, build software, do manuals and provide other goods and services based on this model.
Think about airplanes that take off with empty seats. If they even get as little as $100 for an empty seat, it's $100 more than they would have had otherwise. This is the concept of income on the margin, additional income that would not happen otherwise. You will find it possible to strike these sorts of deals with a lot of suppliers who have unused capacity or time.
And many suppliers of goods or services are in frightfully competitive industries. They may be happy buy some loyalty from you. By helping you out now, they create a loyal customer that may be very profitable for them down the road.
Some suppliers may invest cash in your company. You could formalize these supplier investments through issuing stock or stock options. Talk to a good lawyer before you get into any legal trouble, but this type of financing is a good way to go.
Suppliers aren't looking for personal guarantees. Make it clear that if you fail you’re not going to pay them. They have their eyes open when they enter into this relationship.
You may be able to finance practically everything by asking "who benefits from my success?"
- Most startups give a lot of business to a small number of suppliers
- Vendor credit can mean you finance your business without having to get investors or use your own money or personal guarantees
- Turn your suppliers into your partners. Make them earn your business not just by giving you a good price, but by granting you credit