Although normally overlooked as a financing technique for startups, prepayment is a proven and effective means of raising capital without surrendering equity or taking on debt. It is used in many industries to mobilize financial resources for specific projects—hence, its name “mobilization capital”. The surprise to many entrepreneurs is that it can also be used to raise the equivalent of the seed capital needed to launch their business.
Prepayment, as a means of raising startup capital or expansion capital, can be obtained from customers under two typical conditions:
1) the customer perceives an economic benefit from the discount resulting from paying up-front (e.g., savings will result),
2) the customer perceives a social benefit from the recognition stemming from early financial support of an enterprise (e.g., prestige, status will increase)
There are numerous ways of obtaining prepayment from potential customers. For example, most contractors require 50% deposits before commencing work. This is a legitimate and reasonable request when you must make cash outlays for the materials and supplies necessary to commence the work. Many sophisticated technology entrepreneurs planning on selling B2B intentionally design their startup strategy to justify the provision of mobilization capital in the customer's mind.
Here is a real life example with a unique twist on getting prepayment:
Allerca, San Diego-based company started in 2004, by claiming an innovative genetic technique, that has “bred the world’s first hypoallergenic kitten, opening the doors and arms of millions of pet lovers for whom cuddling a cat has, until now, been a curse … After identifying the genes of kittens with proteins that provide less of a reaction in humans, they selectively bred litters over several generations to end up with an allergy-friendly super cat.” The company had started to collect deposits about two years before they were able to deliver first allergy-free kitten. Hypoallergenic kitten futures were sold for $4,000. Today Allerca sells allergy-free kittens with even steeper price tag of $6,000 with standard order delivery in 24 months and premium placement in 12 months. According to earlier Allerca statements, tens of thousands of people have sent refundable deposits within the first months. Quick estimation shows revenues of at least $40 mln (sic)- more than enough to fund startup operations for years to come.
I devote an entire chapter to mobilization capital techniques in the Smart Startup Guide.
Additional startup financing tools
For financing businesses through government programs see government loans. If a large part of your startup financing is for commercial equipment consider leasing for your Business Equipment Financing.