At least a twice a month we get a call from an upstart suggesting we construct their sales department on a performance basis. What that means is they want to give us a percentage of sales revenue. Now, I can’t think of many vendors who work on consignment. A bottling plant doesn’t receive a percentage of Budwiser’s sales. A cargo company doesn’t receive a percentage of Toyota’s U.S. car sales. A television network doesn’t receive a percentage of Gillette’s razor sales.
Unless that vendor happens to also be an investor. And this is how an investor relationship differs. An investor will provide capital to be used in a specific way (outlined in the business plan) to purchase goods and services from vendors. For example, equipment leasing, office space, raw materials, human resources, professional services, consulting service, advertising, etc. If one of your vendors is also an investor the deal will usually include whatever product/service that vendor provides in lieu of or in addition to capital and in exchange for the usual compensation: An equity stake, or a secured loan against future sales with the right to call the loan (demand payment) with recourse plus some profit sharing.
If you’re an entrepreneur reading this ask yourself if you think it’s right to ask a vendor to purchase products and furnish services for you without an ownership stake or a guaranteed loan pay-back.
We understand the value of boot-strapping a startup. We also understand the allure of using other people’s money. So here are some suggestions for you.
1) Home-equity line of credit. Most banking institutions will provide loans against equity in your home, and because it’s a secured instrument they don’t need to look at your business plan, they’ll just want to know generally what the money will be used for.
2) Unsecured line of credit. Credit unions and banks will provide unsecured lines of credit based on your credit score and history with the bank. You’ll pay a higher percentage because it’s not secured by an asset such as your home, and you will see a bit more scrutiny in the details.
3) Small business loan. These can be secured or unsecured and may come from a credit union, bank or specialty lender. Higher interest rates and more business plan scrutiny.
4) SBA Grants. Small Business Associates has grant programs that you can apply for . Free money! But lots of hoops to jump through and lot of competition.
5) Angels. Angel investor groups or often times family members provide seed money in exchange or fairly large ownership piece of the company.
6) Hard money lenders. High interest, shorter-term pay backs, can be secured or unsecured. Unsecured means higher interest rates.
7) Partnerships. The only kind of ship that doesn’t sail (ha ha). Find a similar company in a related industry. This is your best bet because such a partner can provide expertise, can share expenses, and may even merge with you if things go well.
Being an entrepreneur is no excuse for ignorance. Therefore, we suggest you look at any and all ways to get your company up and running. Stay informed, ask the right questions, see what’s out there, don’t insult vendors, partners or investors, and keep an open mind.
luck, and we’ll see you on Shark Tank.