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The advantages of customer financing over debt and equity financing are considerable.
4 min read
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When starting a new business, two of the main problems every entrepreneur faces are finding a product people will pay for, and financing their business.
While difficult to pull off, the best startup founders are able to meet both of these challenges by getting their earliest customers to tell them exactly what they want, while at the same time paying them to get the business off the ground through first versions of the product and consulting.
Here are my tips to get your earliest customers to help refine your product, while also getting them to actually pay you to build it.
1. Build trust.
When you have the right level of trust with your customer, all doors will open. Doors to new contracts, as well as insights about your product that can only be seen from the outside looking in. Hopefully you have a long-standing reputation in the industry you’re going into. Or, you have connections to give warm intros to your customers. If you don’t have that — don’t worry, three to six months of regular blogging and posting good content on LinkedIn will get you the reputation you need to get in front of the right people and start substantive conversations.
2. Listen to your customer.
A lot has been said about how Steve Jobs told consumers what they want before they wanted it. Unfortunately, most of us aren’t Steve Jobs. My latest company provides advice for business to help them buy the best software, and I’ve had many ideas on how to monetize this website. However, it doesn’t matter what I want, only what my customers want. So, I threw all the crazy ideas I had out the window when I heard time and again that people simply wanted to pay for advertising on the site. The beauty of this strategy is that someone asks you to pursue a given business, you oblige, and then they are much more likely to become a customer.
3. Set up annual contracts with upfront terms.
If you can get paid up front for the year on new contracts, you get lots of cheap financing to build your team and product. This concept is referred to as negative working capital, or the “float.” Think about an insurance company and all it can do with the premiums it collects for years before having to pay out a policy. This allows its business to grow without having to raise debt or equity capital.
For entrepreneurs, this upfront capital is priceless. For your customers, it’s not worth all that much as the payment is already in their annual budget and will simply sit in a bank account until paid to you. In a negotiation, an easy way to expand the pie is to give a slight discount for upfront payment.
4. Do consulting work.
For whatever reason, customers are always willing to pay more money for human hours than for products. So, take 10 percent to 20 percent of your time to do consulting work for your customers. This allows you to build a deeper relationship with them, get to know their pain more acutely, and also earn some extra money on the side, hopefully at a high hourly rate.
Related: 4 Ways to Finance Your Business
5. Transparency wins.
When starting out, don’t feel like you need to pretend you’re GE with a century-old history. Your customers will see through it, and it will change the conversation in a way that doesn’t allow you to ask the exploratory questions that may relate to how your customer wants to pay, for what and how much. Plus, pretending you’re already established will put a damper on the creative brainstorming aspect of the conversation, which means less of the insights you need to push your business model forward.
Overall, getting early customers to finance your business is well within reach for the majority of new businesses. The advantages of customer financing over debt and equity financing are considerable. It’s non-dilutive, no personal risk and no control lost. While it’s harder to put yourself out there without a refined product, the benefits far outweigh the costs.
December 17, 2018 at 11:11AM