Customer Financing may sound extremely confusing, but many companies use this successful technique to bring in funding. Customers are a great way to finance a business for many reasons. To begin with, customer financing is typically non dilutive, meaning they are not seeking ownership of the company, they just want access to the product. Customers also help with matching your product to the industry or market. Since customers have different points of view, they can help with pivoting the product through ideations before it becomes open to the public.
An early customer eagerly wants access to the products or services that your venture will provide and is therefore willing to give you the money to produce the product or service up front. An early customer may spend more with your company down the road, as well as give you credibility with other customers. The most common way customer financing is done is by selling the customer on the product before you’ve built it. If you’re successful, the customer will invest in the production of the product, becoming your first customer (often referred to as receiving a PO (Product Order)). The customer may ask for exclusive rights in return (free products of services).
Example: Think of a hair stylist, she has a few consistent clients; she explains her ideas for her own salon. They agree to front the money for her to start; they in turn ask for free hair cuts for life.
The customer is not seeking equity in the company. Your business is receiving investment without interest rates or dilution of ownership. The only pay back for customers are the possible perks or free incentives.
It is difficult to find a customer willing to put up the money in advance without having seen the completed product. You will need significant sales skills and knowledge to convince the customer to invest. Another negative aspect is the focus of production for that customer investing in your product. The customer will expect certain features of the product for their benefit, which could have negative affects on the success of the products in the market. If the product is tailored a specific way, you may be cutting off a certain demographic of your target audience.
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