In the realm of financing business growth, entrepreneurs often grapple with the challenging decision between compromising equity or shouldering the burden of high-interest bank loans. Selling shares provides immediate liquidity but at the expense of ownership, while bank loans come with high interest payments, repayment costs, growth constraints, and personal guarantees.

Fortunately, a less conventional but equally viable alternative exists: customer financing. This entails persuading customers to prepay for goods or services, offering a unique avenue for working capital infusion without relinquishing ownership or incurring interest obligations.  (A similar concept is called “Float” which Warren Buffet made famous with his insurance holdings.  A summary of that concept can be found here).

The Brad Lorge Success Tale: Leveraging Customer Financing

In 2015, Brad Lorge founded Premonition, a technology company specializing in logistics software for large enterprises. Despite generating substantial revenue from prominent businesses, the protracted decision-making process and expensive implementations with large clients prompted Lorge to explore an alternative financing strategy.

Instead of pursuing traditional dilutive funding rounds, Lorge successfully implemented customer financing, convincing clients to prepay. This strategic move empowered Premonition to leverage upfront capital for expansion. By March 2022, the company achieved an Annual Contract Value (ACV) of $3 million, culminating in its acquisition by Shippit for $20.5 million, with an implied valuation nearly seven times the ACV. Remarkably, due to their reliance on customer financing, Lorge and partners retained 80% ownership during the sale.

Effectively Implementing Customer Financing

For entrepreneurs considering customer prepayment, emulating Lorge’s success involves a thorough understanding of customer needs and motivations. Identifying mutual benefits, such as guaranteed delivery times in exchange for project deposits or offering compelling incentives and discounts, proves crucial in executing a successful customer financing strategy.

Productization as a Strategic Approach

Alternatively, for service-centric businesses, a strategic pivot involves productizing services. This approach entails standardizing and packaging services as products, complete with defined scopes, prices, and deliverables. Examples include website design packages, social media management plans, and content creation bundles.

The objective of productizing services is to streamline the sales process, enhance efficiency, and ensure a consistent customer experience. By presenting services in a standardized package, businesses reduce the time and effort required for sales, minimizing the need for costly customization. Moreover, customers are accustomed to paying upfront for tangible products, making them more amenable to prepaying for a packaged service.

Conclusion: Preserving Equity Through Innovative Funding Strategies

Whether through customer financing or service productization, entrepreneurs possess alternatives to conventional funding approaches, enabling business growth without compromising equity or exposing themselves to cumbersome bank loans. By carefully considering and implementing these innovative strategies, businesses can secure necessary capital while maintaining control over ownership stakes.

Are you curious about how sellable your company is and what you would need to tweak to sell it when you’re ready? Then it’s time to get your Value Builder Score via the questionnaire on our website. It takes about thirteen minutes and your responses are kept confidential. You can complete the questionnaire here.