10/ 01/ 2002
by Andrew Sherman
Let's assume that your personal funds or credit lines are limited, your friends and family either have no money or you don't want to ask them for it, and investing is not for you--what alternatives do you have? There's still hope for finding money at the early stages, although you may have to work a little harder and wait a little longer than you expected. In the realm of high probability/low cost capital-formation options, consider the following creative sources.
University and Private Incubators
Many universities have established business incubators, both to foster entrepreneurship and assist in the "birthing" of new businesses and ideas. These incubators offer shared resources, onsite advisers, cooperative research and development and the natural synergies of having entrepreneurs with different ideas all at the same venue. A more recent trend is the "private incubator," often established by cashed-out entrepreneurs who offer their expertise as well as the physical facilities to foster business growth and development.
Advantages of business incubators:
- Greatly increase the likelihood of survival for start-up firms
- Creates jobs in the community, helping to retain individuals who might leave the area due to lack of job opportunities
- Target low- to moderate-income groups
- Place fledgling businesses together, allowing tenants to participate in joint problem solving, supporting others facing similar problems, exchanging information, and discussing mutual commercial interests
Disadvantages of business incubators:
- Require long start-up time (but the community can be working with entrepreneurs during the start-up time to provide business planning and assistance)
- Carry high start-up cost
- Demand a continual operating budget
- May never become self-supportive
- Most businesses started in an incubator do not grow to be large businesses
- Existing businesses may not be supportive due to fear of competition
Economic Development Agencies (EDAs) and Community Development Corporations (CDCs)
The U.S. Department of Commerce's Economic Development Administration was established by Congress to generate jobs, help retain existing jobs and stimulate industrial and commercial growth in economically distressed areas of the country. EDA assistance is available to rural and urban areas of the nation experiencing high unemployment, low income or sudden and severe economic distress. EDAs work in partnership with state and local governments, regional economic development districts, public and private nonprofit organizations and Indian tribes.
Customer Financing
No one (besides you) is more interested in your success than your customers, and they may be willing to provide funds or other resources to facilitate your launch. In addition to equity, the customers may want some type of partial or full exclusivity to a given product or service, and they can play an expanded role in influencing how the product will be offered, distributed or packaged. For example, a group of retailers may be interested in an early-stage software company whose product, once finished, could streamline their inventory-management systems. In some cases, the customers may form a consortium or buying group to invest in the company. Customers with a vested interest in a business are likely to stay long-term, offer free expertise and lead to new customer referrals.
An alternative to an equity investment would be for the customers to prepay for the product or service in exchange for a discount or other benefits. These customer-financing arrangements can be especially useful if the business requires large upfront development costs, such as the software industry, where targeted licensees/customers could provide early-stage financing in exchange for perpetual, royalty-free and unlimited rights of use in the end product.
Vendor Financing
This form of early-stage financing is fast becoming one of the most popular methods used by small businesses to acquire resources they need for growth. Statistics from the Equipment Leasing Association, based in Arlington, Va., show that vendor financing leapt from a seldom-used sales option to a $13-billion-a-year industry between 1992 and 1998.
Usually business owners select the equipment or supplies they need and then apply for financing through a vendor that offers such arrangements. Some businesses work in reverse, first locating a vendor that offers financing and then selecting equipment from that vendor. Most vendors will prepare the documents in-house, even though financing is a transaction separate from the lease or purchase of the equipment and may be handled by an outside company.
Vendors may also be a useful source for other resources that you would otherwise be raising money to obtain, such as research and development, advertising, promotion and even customer referrals. Typically, larger vendors in a wide variety of industries offer formal programs, have large budgets for customer support and services or focus on smaller, emerging-growth companies that may mature into larger customers. Talk to your largest vendors, and shop competitively for products and services they may be in a position to offer. You'll be pleasantly surprised how many larger companies have targeted the small-business customer as a high priority and have resources ready to offer you at little or no cost.
Andrew Sherman is internationally recognized as an authority on the legal and strategic aspects of entrepreneurship and business growth. As a senior partner with McDermott, Will & Emery, he manages a multi-million dollar corporate and transactional practice, representing Fortune 1000 corporations as well as hundreds of technology-driven, netcentric and rapidly growing businesses.
