The Best Way to Finance Your Business

I’ve had experience raising money in many ways. Each has its advantages and disadvantages.

Using your own money is terrifying. If you go wrong, you may well go broke. Using OPM (other people’s money) seems like a much better way to go at first — but often ends up seeming like a miserable choice later.

When you borrow money or sell shares to start a business, you are putting yourself in a subordinate relationship vis-à-vis your financial backers. Because their money is at risk, they are going to hamstring you with all sorts of restrictions, reporting requirements, and financial regulations. And if business goes badly, the very same people who believed so strongly in you can turn into your worst critics.Getting public money is worse in many ways.

My usual preference is to partner with old partners — people who have the money and the skill to help me make the business work. By a wide margin, that kind of arrangement has resulted in the most frequent and the greatest successes.But there is an even better way to start a new business or venture: Get your customers to pay for your product or service in advance.

The great thing about customer financing is that the only debt you create is the obligation to produce the product — and producing the product puts you in business. You don’t have to give up equity in your business to investors. And you don’t have to follow a bunch of business-limiting regulations issued by the government. You don’t have to collateralize the loan as a bank would require. And you don’t have to worry at night because your nest egg …or that of your family … is at risk.

It’s not every business and every industry that lends itself to customer financing, but it is possible much more often than you’d think.If you don’t have existing customers, or if you don’t think the product you are launching will appeal to them, you need to be more creative. You have to think about how you can reach those customers without spending any money.

The simplest way to do that is to make contact with someone who does have an existing relationship with such customers. Make a deal with him to introduce your idea to them on a profit-splitting basis. You won’t make as much money from each of the initial customers, but after your business is up and running, you can market your product yourself, without his help, and keep all the profits.Spend a few minutes today thinking about how this might be possible in your business or the side business you are launching.