So you want to start that company but you don’t have enough of your own money to do it. Most people think you either borrow the money or find investors, but neither of these are always possible. You won’t get investment if your company isn’t investible. And banks can’t lend you money on faith, you need a credit rating and some collateral. But there are some other ways to get that startup money.
- The absolute best startup financing is prepaid sales. Get a company that knows and trusts you to prepay services, or product development. Give one or more key customers an attractive discount for betting on you early. When I started on my own I sold a year’s worth of consulting, in advance, to the consulting company I was leaving; I accepted only half a year’s money, but it worked. It got me started. Later I got large buyers to prepay software development in order to influence the product features they wanted. I know it’s hard, but it happens.
- Innovative non-traditional borrowing. Even though banks can’t lend you money if you don’t qualify, other people – angel investors, for example – can lend you money if they want to take a risk on you that way. Usually they’ll do it only for additional benefits to compensate for additional risks. That could be a high interest rate, or an “equity kicker” (a small percentage of ownership that they keep even after the debt is paid), or some portion of the debt that converts to equity (ownership). Look into convertible debt and warrants. Fred Wilson had a very good post yesterday on Venture Debt, which isn’t usually applied to startups, but still, an interesting option.
- Percent of revenue, or royalties. This worked beautifully for me in the middle 1990s when I needed professional programming to help turn my business plan templates into Windows applications. I found a company that would work for a small fixed fee per month plus a small percentage of future revenue. Just last year I helped a friend find a fair way to pay a co-author without sharing ownership in her startup. She and her co-author were both happy with a long-term royalty arrangement.
- Do-now pay later. Offer somebody a contract for services paying a bare minimum now and then twice as much later on, as a balloon payment or a series of payments. Say you get a consultant to help you with your business plan and she’d normally want $5,000, but you offer her $10,000 if I can take it in 10 monthly payments starting on the third month. It can happen.
- Lease equipment. Leasing works best when a new business depends on relatively big equipment purchases: the trailer truck, the espresso machine, the dry cleaning equipment, for example. If you can qualify for the lease contract, you turn that big purchase into a long series of monthly purchases.