Value
Chain Financing
Many entrepreneurs believe the only way to fund a new
venture is through traditional loans (e.g., banks or the
SBA) or some form of equity investment (e.g., venture
capital or angel investors). But there are many other
creative ways to secure the start-up funds and working
capital necessary to bring a new business into financial
viability. Working with complementary parties within your
new business's value chain (from materials suppliers and
the facilities owner to distribution networks and retail
outlets), it is possible to secure capital in nontraditional
ways as well.
Securing a physical location for your business introduces
you to the first level in your value chain, the facilities
owner. I've worked on many deals over the years where
the start-up business has subleased space from an established
business in the same or a related industry. For instance,
a manufacturing business might have 15,000 square feet
in its headquarters. You could come in and sublease one
200-square-foot front office and 750 square feet of product
storage space in a corner of the warehouse. The established
business then charges you a flat rate (generally much
lower per square foot than if you secured your own location),
and things like the phones, fax machines, PC network,
copiers and voice mail are shared within certain preset
parameters. Perhaps the established business makes component
parts for you or supplies raw materials or customer referrals.
Having a smaller and emerging business around is like
having another sales rep in the office to generate new
customer accounts, because every time you land a contract,
the big company is guaranteed a "supply sale"
in the deal.
Next, you could negotiate with your distributor to speed
up customer payments by offering discounts. For example,
your customers could agree to pay C.O.D. in return for
a 5 percent discount on their invoices (or a higher discount
if paid before the shipment is received). If you have
a gross margin that can accommodate such a deduction from
the selling price, that would be a great source of front-end
working capital. In addition, your sublease may have a
three- to four-month grace period (I've seen as much as
six months or a year) before sub-rent is due. So if a
few of your first sales invoices can be collected early,
you can generate some positive cash flow in the early
days of operations. Supplier-landlords are sometimes willing
to extend 60 to 90 days trade credit on the component
parts, knowing that once start-ups get established in
their markets, exclusive parts providers' long-term profit
prospects are excellent.
If your start-up is subleasing from a larger business,
you could also sign a mutual-referral deal. Here's an
example of such a deal: A small sheet-metal company sets
up subleased space inside the facilities of a larger heating
and air company. When the entrepreneur comes across a
job too large for his or her capabilities, he or she sends
it directly to the larger business and receives a finder's
fee. The supplier gives the new company 90 days to pay
for duct, insulation and the like. The customers of smaller
residential jobs agree to pay 50 percent upfront and the
other half when the job is finished, and they receive
an overall 10 percent discount on the entire installation.
When the larger company comes across a small residential
job, it refers the work to the smaller company and gets
to sell more supplies. In time, the smaller company could
build a solid book of business and move out of the larger
company's facility, but maintain an exclusive-supplier
and referral arrangement that's a win-win for both companies.
There might be some nominal cash needed upfront (less
than $5,000) for a computer or some printed materials
(brochures, letterhead, business cards) that could be
charged to a personal credit card. But I have even seen
entrepreneurs pick up all kinds of used equipment at less
than half the retail price, or get into "no money
down" leases that secure top-end equipment with little
or no upfront capital investment.
Finding start-up capital comes down to being creative,
having something of value to offer potential partners
and working hard to secure sales revenues that can jump-start
your new venture.
By David Newton
