When it comes to financing the growth of your business, you may find yourself facing a difficult choice between the lesser of two evils. Selling shares in your business can provide an immediate cash injection, but it means giving up some of your valuable equity stake. Borrowing money from a lender, on the other hand, can be costly to repay, can limit your growth, and often requires that you provide a personal guarantee.
However, there is another option: customer financing. This approach involves incenting your customers to prepay for some or all of your product or service, providing you with the necessary working capital to drive growth. This method can be a great alternative to selling equity or taking on debt as it gives you access to cash without having to sacrifice ownership or pay interest.
How Premonition Got Its Customers to Fund the Growth of His Business
In 2015 Brad Lorge founded Premonition, a technology company that provides logistics software to streamline delivery operations for large enterprises. While working with big businesses brought in good revenue, large enterprise customers were slow to make purchasing decisions, and when they did decide to buy, getting them up and running was slow and costly.
Rather than the traditional approach of financing a software start-up (rounds of dilutive funding), Lorge asked his customers to prepay. Having customers pay in advance allowed Premonition to utilize the cash from their customers to fund its growth.
By March 2022 Premonition had grown to $3 million in Annual Contract Value (ACV) when Shippit acquired it for $20.5 million—an implied valuation of just under seven times ACV. Better yet, because they used customer financing, Lorge and his partners still owned 80% of the equity in the company when they sold it.
Customer financing can be a powerful tool for business owners looking to raise money without giving up equity in their businesses. If you’re considering asking your customers to prepay, like Lorge, start by thinking about what type of incentives might be valuable to them. Here are a few ideas:
- Guarantee delivery times in return for upfront payments.
- Accelerated delivery
- Discounts
- Preferred access to new features
Productize Your Service
If you offer a service, another strategy for getting customer prepayments is to consider productizing it. Your services can be productized by standardizing and packaging them as a product with a defined scope, price, and deliverables. It is essentially a predefined service that is delivered repeatedly to multiple clients in a similar fashion, with a fixed set of deliverables, processes, and pricing. Examples of productized services include website design packages, social media management plans, and content creation bundles.
The goal of productizing a service is to simplify the sales process, increase efficiency, and provide a predictable customer experience. It also makes the service more tangible and by creating a standardized offering, you can reduce the amount of time and effort required to close a sale as well as minimize the need for customization.
Best of all, when it comes to products, we are accustomed to paying in advance (e.g., you expect to pay for that box of cereal at the grocery store before going home to dig in). Therefore, if you package your service offering into a product, your customers will be more inclined to pay up front for some or all of your offering.
Productizing your services or asking customers to prepay can be effective ways to obtain the cash your business needs to grow while keeping a tight grip on your equity and avoiding the obligations of a hefty loan.