Dollars From Customers are Worth More

Posted by | May 20, 2013 | business, finance, management, startups | No Comments

Why is a dollar from a customer worth more than a dollar from the bank or from an investor? The nature of the strings attached.

Being in business means makin money. But sometimes you need money to make money. In fact most businesses need some type of outside financing.

There are a variety of approaches, but like most decisions in business, there are advantages and disadvantages to each.

Here are the various approaches to get money in the door:

– bank loan
– credit cards
– seed capital (friends and family)
– angel
– vc / corporate capital

Bank Loans

Getting a bank loan is appealing as you are not required to give up any equity in your company. In fact, banks are probably not interested in your company’s equity or valuation at all. They are more likely to require extensive personal credit history and will almost certainly ask you to be a guarantor of the loan even if the official “borrower” is your company. There is no “corporate veil” when it comes to small business loans. You will be required to back your company with personal collateral and of course this could lead to serious personal consquences.

However, if you have a lull in receipts for a quarter and need bridge financing, bank loans can be a fine choice as they have no side effects beyond the debt servicing.

SBA loans can be a good option and interest rates are relatively low.

Credit Cards

These offer the same benefits and risks as loans in many ways, but the documentation requirements are minimal in comparison. But credit lines can be small and of course credit cards are notorious for high APRs and fees.

Credit cards are usually more appropriate for very short term debt and helping to manage accounts payable. Does your credit card provider offer you no interest checks and balance transfers? These can be used wisely for short term “free money”.

The risk is in getting too comfortable using credit cards. Carrying multiple high credit card balances month to month will become a drag on your cash flow and interest expenses can eat into profit margins. And of course if it gets really bad excessive debt can lead to bankruptcy.

Angel and VC

This type of investment represents a high level of dilution in most instances. If you decide to seek venture capital financing, you may find that doing presentations becomes a full time job. And there is little overall chance of getting funded unless you fit the typically narrow criteria of an investors portfolio.

Customer Money aka MAKING Money

The energy spent on giving powerpoint presentations to VCs or filling out forms for credit checks at your bank can be applied almost directly towards giving customer presentations and investing time in relationship selling. Landing a few big deals will bring in a cash infusion and result in the following benefits:

– addition of credibility and prestige from enhanced customer list
– customer feedback can improve product quality and service levels
– follow-on business as product is adopted further into customer accounts
– references and testimonials can directly increase sales
– use cases and press releases can inspire and inform the market
– no dilution to your equity position
– no debt to service or personal financial risk
– no loss of corporate control
– improved balance sheet and financials
– profitability

Considering all of the benefits of “customer money” why don’t we focus on this type of money always? Well it has disadvantages.

– slow cashflow
– customer requests can be demanding and costs can outstrip revenues
– customer demands can be unreasonable and despite extensive effort and expense, deals can fall through due to any number of reasons, including competitors
– competition may follow success quickly

Also, unlike a loan or an investment, it takes money to make customer money:

– your company incurs cost of customer acuisition and support
– your product must be sellable and you must be prepared to sell it
– costs of marketing, advertising, sales
– costs of insurance, support staff, and other required expenses

The Obvious

It all comes down to product. Will yours allow you to avoid the money from lenders and investors? That question should be considered before undertaking any venture. When will the company be self sustaining, what does success look like and how do we get there?

Questions only you can answer.

20130522-221441.jpg

About John McMahon

John is a serial entrepreneur and full-stack developer. John is currently CEO of Starter Inc. a mobile and web development company, and is the founder of Humor Me Inc. maker of the Chukles consumer mobile humor app. John also currently serves as the CTO for MatanzasGroup, a Global Pharma Consulting Firm. John founded Extentech in 1998, growing it into a leading Web 2.0 spreadsheet tools vendor. In 2012, John sold his 100% stake of Extentech to Infoteria Corporation -- a publicly listed Japanese company. John has recognized expertise in startups, mobile and web development, open source, and cloud computing. John has been a contributor to Accounting World and has been interviewed and featured in stories on PandoDaily and Forbes.com.

Leave a Reply

%d bloggers like this: