This is a abridged compilation of subjects covered in my new book: The Funding Is Out There! Access the Capital You Need to Impact Your Business. – TCW
The definition of a small business depends on who you talk to. Even then, the size criteria changes. Even the Small Business Administration (SBA) has definitions and classifications that depend on the industry. For the SBA, a small business ranges from $0.75 million to well over $35.5 million. (See below for a link to the SBA’s size reference chart.)
For small to medium businesses, finding the right mix of operating cash flow and external capital is critical for growth. What type of funding source SMBs consider and where SMBs go to obtain financing depends on the actual size, growth stage, structure and industry the companies are in. Many entrepreneurs and business owners express frustration and concern about the difficulties they encounter when seeking funding.
Here are five of the myriad ways business owners can obtain financing, taken from the informative new book, The Funding Is Out There!. These five funding sources apply whether your business is closer to the lower end or the higher end of the SBA small business designation range. If you are currently seeking funding for your business, you can put these sources to immediate use. Otherwise, you can use these sources to generate ideas and spark your creative thought process to access the cash you need to impact your business.
Barter/Swap. When I was at Enron, we entered into swaps to trade space on one telecom network for space on another. As a business owner, you have a product or service that someone wants. GAAP recognizes barters and swaps as a legitimate revenue source or expense. Your business recognizes the revenue when it delivers the service or good and the expense when it takes delivery of the service or good.
- If you are in business, you have something to barter or swap or you wouldn’t be in business! The concern is whether or not there is another party that will participate on the other side of your barter/swap transaction without money changing hands. For example, if you want to expand your company from Atlanta to Charlotte, and you have excess office space at your Atlanta location, you can find a Charlotte-based company that wants to expand to Atlanta. You can swap space in your respective offices. Does this sound difficult? It’s amazing what opportunities you can find by keeping abreast of what’s going on in the communities in which you operate and in your industry.
- If this direct barter / swap still sounds difficult, you can use a barter exchange. These exchanges typically charge a membership fee, then a small percentage of the monetary value of each transaction. They allow you to barter your services with multiple entities without worrying if those entities have exactly what your business needs. Bartering impacts your bottom line while conserving your operational cash flow.
Tap your suppliers. For certain service companies and most distribution and manufacturing companies, payments to your companies’ suppliers are one of the largest, if not the largest, expense your company incurs. You can turn this around and make it work for you. You can use a direct public offering (DPO) if you are only trying to raise $1 million or more and tap your suppliers (or your customers) to purchase a small stake in your business.
- If you are rapidly expanding your business, you can approach your suppliers and ask them to advance you some of the funds….or finance the goods they supply you with. If a supplier is a key supplier, your growth may significantly impact their growth. Think in terms of how your success will help your supplier’s revenue and/or profitability increase then make the case, especially if your company’s suppliers are financially stable and have access to financing.
- Some suppliers may provide a loan in excess of the goods or services you purchase. Other suppliers may provide a loan with a one-to-three year payback period. This obviously goes far and beyond the 30 – 90 payment terms, yet this option is more available than you think. Suppliers do not advertise their receptivity to do this. You must ask and make your case by highlighting and stressing the benefits to your supplier.
- If your request fails the first time, you will likely obtain 90-day payment terms at a minimum. If your supplier opts not to provide financing due to specific, expressed concerns, you can address those concerns and circle back in 3-6 months with a follow-up request.
Form strategic partnerships. Siebel Systems, Inc., now a part of Oracle, is an excellent example of how strategic partnerships were used to build a business quickly and reduce the actual amount of upfront cash needed. Tom Siebel and his executive team made the decision to rely on the big consulting firms – Accenture, Deloitte, PWC and other smaller firms to penetrate and grow the market. Consequently, Siebel Systems did not have to build a large in-house consulting team. Instead, Siebel focused on building the partnerships, educating the consulting firms and providing material and internal support to these partnerships.
- Strategic partnerships are a greatly overlooked funding source. Remember, it’s not simply about the money. To obtain financing that best meets your business’ needs, you need to focus on the use of those funds. Tom Siebel’s focus was on building a CRM product and service that rapidly penetrated and grew the market. What’s your focus? Your business can use strategic partners and partnerships to access marketing, accounting, management expertise, and other services or expertise that your company would need to pay for.
- Ask yourself the following questions: What companies are already reaching your customer base? What companies offer complementary products or services that your customers want but that your firm does not currently offer? Which of these businesses offer products or services that may appeal directly to your client or customer base? What companies have the functional expertise or skill set your firm lacks?
- All of the companies you identify as a result of asking the above questions make viable prospective strategic partners. Once you identify them, research their culture and goals to determine which companies appear to have the best potential fit. Approach their senior management or ownership team, if the companies are SMBs, or the head of the department that best matches your business, if the companies are large corporations. Focus on the benefits your prospective partner will derive from the strategic partnership.
- Strategic partnerships, when well defined and focused on a win-win, can provide you with significantly more benefits than many other financing sources.
Find a strategic investor. Strategic investors often operate similar to strategic partnerships but a strategic investor also invests actual funds into your business. Many large corporations focus on tweaking their product and services. They spend their research and development dollars on refining that what they’ve already determined to be successful. With this mindset, it is often much less risky for these companies to make investments in smaller companies that have developed or are developing a new technology, methodology, service, or procedure.
- Ask yourself the following questions: Is there one or more larger companies or Fortune 1000 corporations that could directly benefit directly from your company’s product or service offering? Is there a large corporation in your industry that has expressed an interest in going in your company’s direction but either hasn’t done so or hasn’t gained any traction? Reach out to those companies.
- You will need to convince your strategic investor candidate(s) that you can directly or indirectly positively impact their strategy, top line or bottom line. Strategic investors typically invest using one of the following methods: direct equity investment; a low or no-interest loan; specified usage of the corporation’s credit; prepaid contracts; direct payment of development costs to another entity or absorption of those costs.
- If you think you would like to sell out to a large corporation, seeking and finding a strategic investor will help. Cisco, Xerox, IBM and many other large corporations have made small strategic investments in companies they eventually acquired. Don’t want to be acquired, just want the funding and support? That’s fine, too. Your strategic investor will still benefit from its association with your firm and obtain a return on its investment. Look around. Potential strategic investors abound.
Seller finance. If your company intends to grow through acquisitions, then seller financing is a viable option. Most of the companies and company owners who provided seller financing did not advertise this fact with the broker or M&A firm that represented them. You typically have to ask. Sellers, of course, want to sell their business to viable candidates who will operate their firm as good or better than they did. Therefore, to obtain financing from sellers, you have to sell the seller on how great you and your business are and how the seller benefits from providing the financing.
- From the buyer perspective – you, the question is “Who knows and understands the business better than the person or entity selling it?” If the seller balks when you broach the subject of seller financing after you’ve established a base relationship, run! Unless the seller is ill, the seller is likely hiding something. There may be new competition entering the field or the seller intends to open a competitive business or the business is months away from failure.
- Seller financing can take many forms. It can be an installment loan, an earn-out, a buy down of the equity over time, a consulting contract or employment agreement. That’s the good thing about seller financing. You can arrange the type and terms of the financing to best fit your business’ and the seller’s needs.
- Not sure how to make the approach? You can offer the seller a lien against the business so the current owner gets the business back if your company defaults on the arrangement. Equity buy downs also work. Tell the seller that seller financing provides you with comfort that the seller believes in the business and, therefore, assurance that you will get what you pay for.
“Excerpted from The Funding Is Out There! Access the Cash You Need to Impact Your Business ©2014 Tiffany C. Wright. Used with permission of Morgan James Publishing. All rights reserved. Available in October 2014. Get your advance copy at http://theresourcefulceo/campaign.”