Sources of Financing for Web-based Businesses
Every business needs cash. Cash is needed for daily expenses and cash is needed for business growth. Securing financing for a web-based business can be challenging because inherently these businesses do not own significant hard assets.
The list outlined below is not meant to provide information on any specific funding organizations. Instead, it is meant to push you to expand your mind about where money can come from for your website business.
1. Customer Financing
One of the primary benefits of website businesses is that customers tend to pay for the product upfront. The customer’s credit card or online payment is often processed initially before the product is delivered to that customer. As such, most website businesses do not have any notable accounts receivable.
However, in some cases, website businesses sell products to customers and only receive partial payment for those products upfront. For example, some large websites sell advertising space on their online platforms and only receive payment after the ads have reached a certain number of Impressions (CPM) or clicks (Cost-Per-Click) or after they have been displayed for a specific time-frame.
Some website businesses offer customers a significant price discount if the customer is willing to pay for this ad space upfront. In this way, the customer essentially finances the business.
This offer is often presented to major corporate customers. It can be a very cheap way to finance a business.
2. Strategic Financing
If you are running a small website business that can be a good complementary fit for a much larger business, it may be possible to sell a stake in your business to that corporate partner. In this way, the corporate partner takes an equity stake or other form of interest in your business and, in turn, you receive cash to finance your business.
In certain instances, a corporate partner can provide more than just money to you. The corporate partner may provide access to its infrastructure such as servers, equipment, office space, or even technical and managerial expertise. This may be worth much more than money.
Finding the right corporate partner that fits perfectly with your business can be very challenging. But if a good partner and fit can be found, it can be very lucrative for both parties.
3. Technology Licensing
Sometimes a technology business that has developed a valuable piece of software or hardware may run out of money for further development. Depending on the stage of development, the business can license its new technology to businesses that may need it. This could provide an infusion of cash that the licensor’s business badly needs.
The main risk in a licensing deal is that the new technology is prematurely disclosed to the public. There is always the risk that a licensee may reverse engineer the product and later on develop a competing product. Legal agreements can be drawn up to mitigate this risk.
4. Mergers
This option is similar to strategic financing but not exactly the same. In this situation, if two or more companies’ interests are aligned, it may be a good idea to join forces as a merged entity. In this way, certain costs may be shared between both parties such as technology development costs, office space, management teams, or technological expertise. This may reduce the costs for everyone.
A merger could actually be a cash acquisition of one business by another or a stock swap between the shareholders of both businesses.
5. In-kind Funding
What is in-kind funding? This is a kind of funding in which services may be exchanged between two parties in return for mutual consideration.
For example, your website business may not be able to afford to advertise on a very high-traffic website. The owner of that high-traffic website may be open to providing free advertising space to your business in exchange for an equity stake in your business.
This was a very common form of financing in the heyday of the .com boom. Large media companies with high-traffic online properties often acquired equity stakes in dozens or hundreds of new online startups by simply providing advertising space to these startups on their media properties.
It was beneficial to the media company because the added exposure for the startup could provide the startup with more traffic, more leads, more customers, and therefore, more revenues. This, in turn, increased the value of the equity stake owned by the media company in that startup. For the startup, it did not have to pay high advertising costs that it could not afford and it still benefited from increased revenues.
Of course, as we all know, this increased revenues did not always materialize for most online startups. Hence the .com bubble burst.
6. Software-as-a-Service (SaaS) funding
With the rise of SaaS businesses over the last few years, investment funds have been created to provide funding to these types of businesses. The allure of a SaaS business is that it has a built-in base of subscribers who pay scheduled subscription fees to receive the software product regularly via the web. And delivery of this product over the web is cheap and effective.
An investment fund can forecast with relative accuracy how much cash-flow the business can expect to receive over a specific time-frame. Of course, these forecasts take into account that some subscribers may cancel their subscriptions during that time-frame. It accounts for subscriber attrition to forecast net cash-flow.
The financing is generally provided as debt. As such, a lender can feel comfortable that the business can afford to make scheduled debt payments proportional to its net cash-flow.
A simple Google search for SaaS business funding will list out numerous funding options.
7. Equipment Leasing
In the rare instances where a website business owns equipment, it may be a good idea to sell that equipment and lease it back in order to receive cash and reduce ongoing operating costs. Equipment could be servers, computers, printers, and much more.
8. Government Funding
Depending on your age, geographical area, ethnicity, gender, or financial situation, most states and local governments have programs designed to help budding entrepreneurs fund their businesses. It is a way for the government to encourage entrepreneurship and assist business owners who, in turn, may go on to provide jobs to citizens and pay taxes to the government.
The types of funding programs vary from region to region so it is best to do some research about your specific geographical region.
9. Slash Expenses
In business, you can never predict the top line (revenues) but you can control expenses. So, if all else fails, slash expenses. Get rid of any unnecessary costs such as reduce advertising spending, eliminate unnecessary travel and entertainment, or you may even have to let go of some staff members.
You have to do what you have to do.
Author: Kris Tabetando
Kris Tabetando provides mergers & acquisitions (M&A) advisory and brokerage services to Internet companies. He also partners with investors to acquire & manage Internet businesses.
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