Product based businesses often operate, even long-term, in a stop and go fashion, which makes lines of credit or access to cash very important, whether you're in your 1st year or your 10th year. This is a tough lesson some businesses learn too late in the game, and it ends up hurting them in major ways. I will never forget hearing from the founder of UGG Boots, Brian Smith, about how this was the main reason he ended up selling off his business. The cash flow/lending portion of the business became exhausting and after more than a decade of dealing with it, he finally had enough. I'm sharing this with you to show that this isn't something that always gets easier with time. With a product-based business, it seems you cannot totally avoid this, but you can use this information to see into the future and prepare for the ebb and flow you will inevitably experience.
Why Is It So Difficult to Find Funding?
This is a major question for all of you creative-types, who are thinking of bringing a product to market in 2017. So I went to an expert in the game, President and Co-Founder of AllGreen, Sara Nash. Her background in banking plus consumer and commercial credit help her deliver knowledge with a one-two punch, because she understands how small businesses work and she knows how big banks operate. The simple answer is: risk. This is the reason it is so difficult to find funding.
We already know that you have to 'prove that the dog will eat the dog food' in order to convince lenders that you have something worth taking a risk on. That means, there has to be some sort of proof of concept, proof of market viability, proof of market traction... you get the point. You have to be able to prove that your product is something people will actually buy and that it's not just "another great idea." You can do this by:
- Showing revenue: Even if your revenue isn't profitable yet because it has to go back into the business to cover debt, inventory, etc. this still shows that sales are possible and there is proof of concept.
- Obtaining P.O's: Purchase orders show possible lenders that, even though there is no actual purchase yet, there is serious interest and someone, or multiple someone's, will purchase your product.
This type of asset financing is unique to product-based businesses and allows an additional route to financing given how difficult it can sometimes be for inventors to find a good match in a lender. A personal line of credit is another option to consider, if your personal credit score is sitting above 680. A lot of lenders may be willing to start this out at a small amount to establish a relationship and reduce risk. This is fine because it is easier for you to grow this amount over time as you work with the lender to decrease the level of risk for them.
How Can You Prepare to Find Your Lender?
Sara and I break this down into what we are calling The 3 P's. Three easy steps you can take to get ready for financing:
- Personal Credit: As mentioned above, your credit is a very important piece of this puzzle. Work to get your personal credit in order so that when the time comes, you can show that you are financially responsible.
- Plan, Plan, Plan: Get your pricing together, get your quotes together, and look at every single detail you can think of. Do your research, seek out vendors who match what you're doing and have already invested in similar products. Every detail matters, and the more you plan before seeking out that lender, the better your chances are of finding success. Make sure you incorporate your business with a business attorney rather than generic online sources so you can make sure your business and patents are legitimate. More often than not, product-based business owners usually end up putting a patent on the something special, for protection. If you reach this point and your ducks aren't all in a row, it will be incredibly difficult to prove that your special idea isn't at risk the minute you hit the market. You can never over plan before meeting with a lender.
- People: Build relationships with people - network, get others vested in your product, and surround yourself with others who believe in your concept. Make the most of your networking time to grow your movement and following as you move forward.
All of these things are not a guarantee for funding, but they are all steps in the right direction of proving that you are serious about your product and willing to do what it takes. The market is so competitive and this is what lenders will need to see in 2017, so that you can, as Successful Pitch author, John Livesay says, "go from invisible to investable."