Do you need money to keep your business running? If so, who will provide it, and on what terms? In my 2012 book, Hungry Start-Up Strategy, I highlighted many answers to these questions. I think the best source of small-business financing is to sell a product customers find valuable enough to pay a price that enables your business to operate profitably.
As soon as you involve others -- such as venture capitalists or banks -- in your business, you give up control in ways that can put your company at risk. For example, venture capitalists often require you to put their partners on your board and to give them the power to replace you as CEO. Banks can charge high loan rates and liquidate your assets if you don't keep up with the payments.
It is not easy for business leaders to operate profitably from the start by selling their product at a price that ensures the company's positive cash flow. Happily, there are other ways that leaders can give customers an opportunity to finance their business.
Here are three other good -- if imperfect -- ways for customers to finance your business.
1. Sell equity to your customers.
While the details are hard to pull off, private companies can sell equity to their customers.
A case in point is BrewDog, a Scottish beer company, whose CEO, James Watt, is a lawyer. As I wrote in 2010, BrewDog couldn't get a bank loan in 2009 because of the weak financial markets. So the brewer set up a website where BrewDog fans could buy shares at a minimum investment of $361. The idea ultimately raised $1.2 million from 1,500 investors after making the investment required to comply with British financial regulations, which included providing a full audit on its accounts.
By March 2012, BrewDog's products were available in over 27 countries, and 65 percent of its $11 million in 2011 sales came from outside the U.K. By 2022, its sales had risen to about $413 million, according to Scottish Financial News.
2. Encourage customers to participate in a crowdfunding campaign.
Crowdfunding, in which customers part with their money in exchange for early access to a company's products, has many advantages for companies. Here are some Fundera 2022 crowdfunding statistics I found interesting:
- Crowdfunding generates $17.2 billion in North America annually
- In 2022, funds raised through crowdfunding increased 33.7 percent
- 2022 hosted 6,455,080 worldwide crowdfunding campaigns
- Successful crowdfunding campaigns raise an average of $28,656
- The average crowdfunding campaign raised $824 in 2022
- Only 22.4 percent of crowdfunding campaigns succeed
It also involves some disadvantages. Most notably, the customers who crowdfund a company that is acquired might feel tricked when they realize too late they never owned equity.
According to USA Today, people who contributed $2.4 million to fund the September 2012 Kickstarter campaign for Oculus Rift's virtual reality headset were shocked in March 2024 to realize they would not receive any of the $2 billion Facebook spent to acquire Oculus.
Here is what John Wolf, Kickstarter contributor, wrote: "I would have NEVER given a single cent of my money to Oculus if I had known you were going to sell out to Facebook."
3. Sell bonds to customers without giving up equity.
Another way to finance your business is to sell "bonds to hundreds of customers and community members, with some investing as little as $10," according to the Wall Street Journal.
The good news about this approach is that local restaurants or retailers can raise capital from their customers and community members. What's more, if they buy regularly, they have an incentive to keep your company afloat.
The ability to raise money in this way is relatively recent. It took three years after passage of a 2012 Jobs Act provision for debt-fundraising platforms like Mainvest, Honeycomb Credit, SMBX, and WeFunder to get off the ground. Since 2021, more than 700 companies have raised money through debt or revenue sharing on these platforms.
The challenge for companies is the high interest rates they must pay on the bonds. For example, as the Journal reported, in April 2023, Palm City Wines raised more than $400,000 by issuing a small-business bond paying 9.5 percent interest on customers' investment monthly over five years.
Palm City Wines co-founder Dennis Cantwell was happy customers could finance the retailer. "This gave an opportunity for people who supported us [by purchasing our product] to support us in another way," Cantwell told the Journal.
If you can handle their negative aspects, these four approaches to customer financing may keep your business growing.
BY PETER COHAN, FOUNDER, PETER S. COHAN & ASSOCIATES@PETERCOHAN
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