When it comes to financing the growth of your business, you may find yourself facing a 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 equity stake. Borrowing money from a bank can be costly to repay, can limit your growth, and often requires a personal guarantee.
There is a third option: customer financing. This approach involves convincing your customers to prepay for some or all of your product or service, providing you with the working capital to drive growth. It gives you access to cash without having to sacrifice ownership or pay 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. Working with big businesses brought in good revenue, but 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. If an implementation failed, Premonition risked losing months of work for nothing.
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 use that cash 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. If you’re considering getting your customers to prepay, like Lorge, 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?
Productize your service
If you offer a service, another strategy for getting customer prepayments is to productize it. A productized service has been standardized and packaged as a product with a defined scope, price, and deliverables. It is a predefined service delivered repeatedly to multiple clients in a similar fashion, with a fixed set of deliverables, processes, and pricing. Examples 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. A standardized offering reduces the time and effort required to close a sale and minimizes the need for customization, which is time-consuming and expensive.
Best of all, when it comes to products, we are accustomed to paying in advance. You expect to pay for that box of cereal at the grocery store before going home to dig in. If you package your service offering into a product, your customers will be more inclined to pay up front for some or all of it.
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 bank loan.