In this final part of our 3 part series on funding your kingdom business we explore some of the other alternatives for funding that are often forgotten.
Alternatives to Debt & Equity Funding
Cash Reserves for Depreciation – assets in your business such as computers, printers eventually need replacing as they wear out. Whilst depreciation is a non-cash item in the company’s financial statements, I recommend that you set money aside for the future when these items are going to need to be replaced.
Cash Reserves as an Emergency Fund – in life and in business unexpected events occur. It is wise to set aside funds to ensure that the business can cope. The loss of a key employee who brought in a lot of sales may cause the business to suffer.
Build up Retained Earnings to Fund Growth – rather than borrowing money to expand or issuing new shares in your business – instead use past earnings that have built up to fund the growth.
Have all the appropriate insurances – unexpected events happen in business. Many of these events are ordinary business risks that can be mitigated through insurance.
Revenue sharing can mean multiple things, however in its simplest terms it means that a portion of revenue is shared with those that are funding the business in some way.
When a business starts up it may have insufficient capital to hire key staff that it needs in order to grow. Rather than borrow money or issue shares it can give them a share of the company revenue in exchange for their services.
An alternative meaning of revenue sharing is that you give up a portion of the company’s revenue in order to generate additional sales. An example of this would be Amazon’s affiliate program whereby you can refer people to their site to buy a book from your site. In return Amazon gives you a portion of the revenue. This is more ‘affiliate marketing’ than trying to fund a business even though technically it is a sharing of the revenue. Hence the problematic nature of the term ‘revenue sharing’. It is however a very effective growth strategy.
If you have insufficient funds there is always the option of going into partnership. A ‘Partnership’ does not have to be equal interests they can be varying proportions. They have to be given very careful consideration due to the potential for relationship breakdown between the partners or the commonly held view that ‘one partner is not pulling their weight’ which is one of the biggest causes of partnership breakdown.
When constructing a partnership arrangement you should consider what outcome all partners would like under different scenarios:
- What if one of you dies or becomes long-term sick?
- What about when one of you wants to retire? Sea change?
- What if one partner has poor performance?
Partnerships can bring in a unique source of funding but need to be planned carefully.
In recent years, and thanks to the internet, businesses can now attract what is called “Crowd Funding”, that is money to launch and grow your business from people that you don’t know at all, but who have an interest and belief in what you are creating. There are two broad models:
- Donation-based funding: The birth of crowd funding has come through this model, where funders donate usually towards a charitable cause. A similar tangent of this is reward-based funding whereby people contribute funds in return for products or perks.
- Investment Crowd Funding – businesses that need capital sell ownership online in the form of equity or debt. The funders have a stake in the business and aim to achieve a financial return.