Whether you’re just starting out, or you have years of successful business at your back, getting access to working capital can mean the difference between life and death. Will you be able to jump on a new opportunity while your cash-flow is tied up in existing orders? What about getting a new idea off the ground? How much will it cost, and do you have enough money to fuel your launch until you get to the breakeven point?
In this article, we’ll look at 4 strategies for raising working capital to help a startup, or an existing business flourish.
1. Participation Points
You don’t need to give up equity or sell a product to raise money. Take a note from an unlikely source, the Perry High School’s badminton team. Yes, you read that correctly. Your business could learn a thing or two from how they’re funding their athletic department. According to an article published on Cronkite News, the badminton team is raising money to keep the lights on by offering fans the opportunity to play a round with them in an exhibition game.
Think about how your customers and community interact with your brand. Is there an opportunity to allow enthusiasts to become more than just casual observers? You could offer an extended tour of your facility, or the opportunity to work for a day in your office or assembly line. While it might not sound exciting to you, there are a ton of experience-seekers out there looking for life experiences. If you can connect with the right people, charging them a fee to live a day in the life could be one way to establish new relationships and raise some revenue.
2. Sub-Lease Office Space
Startups are looking for ways to lower operating costs. As cash flows are lean in early years, working from home might be a great way to start out. But as the demands of business grow, working from home can become increasingly frustrating. According to a recent article published by Fusion, “…on average, people who telecommute 15.1 hours a week or more (or roughly two days per week) actually report decreased job satisfaction.”
Help startups in your community get out of the second bedroom and into an office; more specifically your office. The majority of businesses have extra offices or workspaces that aren’t utilized. Sub-letting the space to a freelancer or startup is a great way to offset overhead costs.
You’ll find that in many cases, renting a larger space lowers the cost of the lease per square foot. If you’re willing to sublease your space, you could take advantage of lower per-foot rent by renting a slightly larger space than you need. Then, simply offer the extra offices (at a profitable rate) to other businesses that could use the space. Just be warned that finding good tenants can be a challenge, and you may have periods of vacancy in the extra space, which will need to be compensated for in your operating budget.
3. Creative Combinations of Debt and Equity
As I was building my business, one of my friends asked me if the debt I would be taking on would be convertible. He’s a lawyer in the bay area and fairly familiar with startups. He saw my puzzled look and explained that in the legal field, companies offer to provide some plaintiffs with creative “lawsuit loans”. With these types of loans, according to Professional Settlement Funding, “…there is no obligation to repay the advance if there is no recovery on the lawsuit. This makes the deal “non-recourse” because the “lawsuit lender” has no right to pursue repayment in the event the lawsuit fails.”
In the world of start-ups, there are also some creative funding options that became popular in the 80’s. For example, venture-debt is a great way to lower the cost of accessing capital by leveraging both debt and equity. For example, a traditional round of funding might require you to give up 20% of your company for $100,000 in investment. With venture-debt, you could negotiate a deal where you get access to the $100,000 you need, but instead of 20%, you’ll only need to give up 8% of your company. Of course, the $100,000 is treated as a loan and will need to be paid back with interest.
The key to raising funding is de-risking the transaction. In a funding pitch, you’ll obviously want to focus on all of the data-points that prove your business is viable. Offering a lender a chance at equity is a great way to find the sweet spot between high-interest debt and equity-draining investment rounds.
4. Develop Strategic Relationships
If you do decide to raise capital by parting with equity early in the game, it’s best to look for a partner that can help ramp up your business quickly. For sales people, this is known as networking. In the world of startup capital, it’s known as strategic partnerships.
For example, some companies pitch investment opportunities to their customers. If your company is unique and solves a frustrating problem for their business, they may be willing to invest and become a partner in making sure your company can continue to solve that problem. Then, once they’re invested, they could introduce you to their circle of contacts which could lead to more sales.
No matter how you fund your business, make sure to keep a careful eye on operating expenses. Look for ways to de-risk the deal in order to gain access to cost-effective capital. If your customers and the community are passionate about your service, find ways for them to get involved in your mission. By being inclusive, cost-conscious and strategic in your thinking, you’ll place yourself on the path towards financial freedom!