Unconventional Financing Ideas

Get Creative

D'Aquanni routinely barters to pay for professional services for her business; both her accountant and Web site designer accept chocolates in exchange for their services. She even taught two event planners to make chocolates in return for assistance during peak periods. Says D'Aquanni, "We've been on a very tight budget from Day One."

Approaching friends and family is another option, but experts say you should put such deals in writing. Avoid the strategy altogether if you're uncomfortable discussing money with them. "You have to be forthright and treat it like any other professional relationship," McCabe cautions.

Customer and vendor financing also are viable options, though business owners are often uncomfortable asking customers and vendors for funding out of fear of highlighting capital problems. Brigham suggests developing a comprehensive proposal prior to making a request. "Many entrepreneurs prematurely propose a financing arrangement without developing the plan in writing," he says. They're then ill-prepared to answer questions, which can affect credibility.

A strategic alliance isn't for the weak communicator either. Both companies must thoroughly assess the other's commitment to a joint venture, as well as discuss more technical matters, such as how they'll split revenues. "[Business owners] believe that if they fail, it's because the other person didn't do their part," McCabe says. "And if they succeed, they think they could have done it without them anyway. It's not something I strongly encourage."

However, a carefully worded legal document can soften the blow of an unsuccessful pairing. When Chris Johnson sought to expand his food company, which sells private-label meats and dry goods, by purchasing a competitor in 1999, he had to devise an inventive funding scheme. Johnson, who founded Consumer's Choice Foods Inc. with $10,000 of his own money, lacked funding to buy his competitor outright. What he did have was a proposal that would pay the owner to stay on as a contractor, compensating him based on job performance and providing a second commission to pay toward the $45,000 business purchase. "I had it structured in such a way that if he didn't perform," explains Johnson, 33, "then we bought his company for zero."

Johnson, who was just 26 when he took the plunge, learned early that his $3 million Omaha, Nebraska, company would have to go it alone when it came to financing. "It's tough to borrow money without collateral," he says. While his competitor initially scoffed at his unusual buyout offer, Johnson kept emphasizing that the company would gain access to the resources of a larger, more professional organization. Johnson, in turn, would be able to increase his customer base.

"It took a lot of wining and dining to get him to turn over his company for nothing on the dream that it could be big," says Johnson. The union didn't last--the partner was terminated after 10 months for failing to abide by their legal agreement. "Although we worked four months negotiating, [the agreement] had to be in writing with the intention that we'd put it in a drawer and never look at it again," he says. "You only pull those things out when things go awry. And, unfortunately, we had to do that."

If not for a resourceful nature and a willingness to pursue an unusual financing strategy when other options were nonexistent, Johnson's company would not have reached its full potential. The reality is that a multitude of factors, including Johnson's age and lack of business experience, contributed to his funding shortfall during a critical growth period. Eager to expand his customer base anyway, he took matters into his own hands. Cash-strapped but creative entrepreneurs can learn how to stretch an operating budget; unearth little-known credit programs; and, as Johnson and chocolatier D'Aquanni have proved, make a major purchase without even a down payment. Says McCabe: "If there's a will, there's a way. There are a lot of businesses that were not founded by going in and getting a big loan."

Money Makeover

John Acosta is in a financial rut. He needs $100,000 to upgrade his product, a garage door opener for motorcyclists, but the financing community has given him a cool response.

Washington, DC, attorney Andrew Sherman acknowledges that Acosta, who has sold $50,000 worth of his product but lacks a major distribution outlet, has his work cut out for him. But he does have options. A home equity line is a start, Sherman says, "especially at today's rates." A partnership with a garage door, motorcycle or home-products company is another option. "He has to do some digging to find out who the contact person would be at those companies," says Sherman, author of Raising Capital.

Acosta could also do a private placement memorandum to raise capital through the sale of shares in the company. "His company may be too small for a venture capitalist, but he could do a small-scale offering if he knows 10 people who might come in on a unit basis," Sherman says. Check securities laws and consult an attorney who specializes in those transactions.

One last option: angel investors. "There are angels that wouldn't view, in this market, a $100,000 investment as too small," Sherman says. "This is a very difficult market in which only talking to one or two [angels] may not be a good indication."

Crystal Detamore-Rodman is a Charlottesville, Virginia, writer who covers small-business finance.

« Previous 1 2 Page 3
Loading the player ...

50 Cent and Intel Unveil High-Tech Headphones: "I Invest in Things I Can Move the Needle In."

Ads by Google

Share Your Thoughts

Connect with Entrepreneur

Most Shared Stories