Let’s assume that you have a great product that you want to launch. It solves a very specific problem, has mass appeal, and is destined for success. If you are like most entrepreneurs nowadays, you will create a crowdfunding campaign to see if your product has traction. Entrepreneurs do this every day through well-known platforms such as Kickstarter, Indiegogo, etc.
These platforms allow you to test if your product has appeal – a market. And, more importantly, they let you test if people are willing to buy your product. If people are willing to open their wallets and pay for your product, there is a good chance that you may be on to something.
Your product is a success!
Keeping with this line of thought, let’s say that you run a successful Kickstarter and you get lots of orders. In turn, you manufacture the product and ship it to your customers, who end up loving your product. Clearly, you have a success on your hands. But you also have a problem. Actually, you have a big problem. How do you scale and handle large orders?
You got an order from a large retailer. Now what?
Few product companies want to sell directly to the public. Instead, their next logical step is to look for orders from wholesalers or large retail clients. Getting these orders is very difficult, but you could have a decent shot at it if your product has mass appeal and is profitable.
If this works, you will meet with buyers from large retailers, like Walmart, Costco, or Best Buy. They will put you through their interview process and, if you are successful, you get a test order. Many entrepreneurs see this order as the pinnacle of their success. Surely, getting a test order from a large retailer is the gateway to success and riches.
There is just one problem. Unlike your Kickstarter clients, large retailers don’t prepay for their products. Instead, they expect you to pay for your production costs. They pay you after delivery, usually in 30 to 90 days. This bring us back to the problem. How do you scale? How do you pay for the production run to fulfill large orders?
Many small companies have perished trying to solve this problem.
Is bank financing an option?
The short answer is “maybe, but probably not.” You have to remember that banks don’t lend money against ideas. Instead, they lend it against collateral. If you want a loan (or line of credit), you need to have collateral to cover for it. And by “collateral,” I mean things like cash, short-term securities, real estate, inventory, machinery, etc. Oh, and you also need a track record of success.
As you can imagine, few scrappy little startups meet these requirements (yes, I am being a cynic).
The other problem with bank financing is that it takes time to get. They may need weeks or months to underwrite your file. In the meantime, you are sitting on a purchase order from a major retailer. And the clock is ticking…
What about venture capital or angel investors?
Another alternative is to look for venture or angel funding. Getting this type of funding is notoriously difficult – akin to winning the lottery. However, you may have a solid chance if you show them the track record of your crowdfunding campaign. Angels and venture capitalists love good track records.
However, I have a small problem with this strategy. Basically, you are giving up equity in exchange for money and advice. And you are giving up equity when your valuation is likely to be at a low point. Consequently, choose an investor who has tons of retail experience and can give you solid advice. But if all they can offer is money, be careful.
Better yet, try an alternative source of funding that will not cost you equity.
Why purchase order finance may be the right choice
One alternative that could help you if you have a large order from a retail client is purchase order (PO) financing. This solution is designed to solve this specific problem. It helps cover the cost of your supplier expenses, which allows you to manufacture the goods to fulfill the order – even if you don’t have a lot of capital. This video explains how PO financing works.
A few key points. For PO financing to work, you must:
- Use a third-party manufacturing company in the US or overseas
- Work with a manufacturing company who is your single supplier
- Have gross profit margins of at least 20% (though 30% is better)
- Have a non-cancellable purchase order from a creditworthy company
Advantages and disadvantages of purchase order funding
Keep in mind that no solution is perfect. Rather, you need to evaluate the advantages and disadvantages of the solution and weigh them against your opportunity. In the case of PO financing, here is a short list of advantages and disadvantages:
- You don’t have to give up any equity
- Size of financing adapts to the size of your PO, supporting growth
- Can be deployed quickly – often in a week or two
- Can be used as a stepping stone to other types of funding, like angel investments, venture capital, or bank loans
- Has very specific qualification requirements
- Can work only in transactions that have high gross margins
- It can be expensive – especially compared to bank financing
Author credit: marco_terry
Article sourced from: https://factor-this.com/how-to-finance-growth-after-a-successful-crowdfunding-campaign/