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


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