Financing your new business: Orders vs. Cash
New business owners, contemplating starting a business or already in the process, struggle year in and year out finding the capital they need. It is just a reality of entrepreneurship in America.
However, many of these budding business people still think that they should raise capital first – before having an actual business in place. It makes sense, how do you get a business off the ground without money? How does a business fulfill orders without the capital needed to complete those orders? A real chicken or the egg predicament?
But, I say, in this instance, it is better to put the cart before the horse.
Most businesses, in seeking capital, will be asked the same question over and over again; “How much revenue or sales do you have to-date?” And, most new entrepreneurs will answer the same way; “I am trying to raise money before starting my business!”
It does not matter if your business is seeking bank financing or equity capital, very few money providers will take a chance on an unproven idea or concept. In this day and age, no orders and no sales means no business – no business today and no business tomorrow.
Lenders or investors simply want to invest or lend to businesses – not business ideas. An idea is just an idea and it does not nor ever will pay the bills, service the debt or return an investment unless it becomes a business. It will only become a business when there are people willing to part with their money for the offered product or service – either by means of actual sales or at the very least purchase orders in hand.
So, how does a new entrepreneur build a business before raising capital?
Depending on your business, you could simply promise what you don’t have, get the sale (putting the cart before the horse) then seek financing to complete the order. This was essentially the way Bill Gates started Microsoft by promising IBM something that he really did not have – but, knew that he would find a way to get it.
Once your business has an order or orders in hand, it is no longer a business idea but an actual business trying to find ways to survive just like any other established business.
With the order in hand, most successful business owners turn to bootstrapping by either taking additional mortgages on their homes, maxing out credit cards, tapping retirement plans or (which I don’t recommend) raiding their children’s college funds. But, if you believe in what you are doing and have confidence in your self and your idea – these are easy decisions to make as the potential rewards will more than make up for these risks.
Additionally, and probably more favorable to new entrepreneurs since the business is no longer in the idea stage but in the production and delivery stage, there are outside means of financing these orders. Banks and other investors will be more open to listening to you or there has been an entire financial industry that has cropped up just to help business owners in this situation – called Purchase Order Financing.
Purchase Order Financing is simple. You have orders in hand from strong customers but lack the capital to complete the order – these lenders will advance the funds you need including funding for materials and even labor. When the job is complete and you get paid by your customer, you return the advance and keep the profits.
The goal here is to grow your business – to get it beyond the idea stage. To truly be successful, you have to do whatever it takes to get the job done – even if that means selling a product or service that you don’t actually have or don’t have the means (yet) to complete.
Other ways besides those mentioned above to fund orders in hand would be to:
Negotiate with your buyers or customers – if your cost of goods sold is say 50% of the product price, negotiate for that 50% or more up front. This will at the least cover your variable costs. Or,
If the order is for large volumes, negotiate tranches of those orders in amounts that you can fully finance on your own (using the other methods described here). Example, if you have an order in hand for 100 units of your product – tell them you will deliver and expect payment for 10 at a time.
The bottom line here is to simply do whatever it takes to be successful – try everything and see what works – this is much better than sitting back and trying to raise the money first. Would you rather take a chance and have to tell a customer you cannot complete an order or waste time and personal money trying to obtain very hard to find start-up funding?
It can all start with getting that first order!
Joseph Lizio holds a MBA in Finance and Entrepreneurship and has a strong commercial lending background. In his current venture, Mr. Lizio is the founder of - Business Money Today - , a site designed to help business owners find and obtain capital to grow their businesses.
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