How to Protect Your Equity When Your Business is Thirsty for Cash

How to Protect Your Equity When Your Business is Thirsty for Cash

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.  On the other hand, borrowing money from a bank can be costly to repay, limit your growth, and often require a personal guarantee.

However, there is a third option: customer financing.  This approach involves your customers prepaying 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 bank debt and gives you access to cash without sacrificing ownership or paying interest.

How Brad Lorge Got His 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 enterprise companies.   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.  Premonition risked losing months’ worth of work for nothing if an implementation failed.

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 utilise the cash from its customers to fund its growth.

By March 2022, Premonition had grown to US$3 million in Annual Contract Value (ACV) when Shippit acquired it for US$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 getting your customers to prepay, start by understanding your customer’s needs and motivations.  Consider what’s in it for your customer to prepay.  Could you guarantee delivery times in return for a project deposit?  Could you offer incentives or discounts that make sense for your business and your customers?

Productise Your Service

If you offer a service, another strategy for getting customer prepayments is to consider productising it.  A productised service is a service offering that has been standardised and packaged as a product with a defined scope, price, and deliverables.  It is essentially a predefined service delivered repeatedly to multiple clients in a similar fashion, with a fixed set of deliverables, processes, and pricing.  Examples of productised services include website design packages, social media management plans, and content creation bundles.

Productising a service aims to simplify the sales process, increase efficiency, and provide a predictable customer experience.  By creating a standardised offering, service providers can reduce the time and effort required to close a sale and minimise the need for customisation, which can be time-consuming and expensive.

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 upfront for some or all of your offering.

Productising 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 bank loan.