Revenue from customers is this magical form of renewable non-dilutive funding for your business. But did you know that the magic of customers doesn't stop there? 

Any company that has talked to a capital provider knows that relationships with your customers are critical for raising capital. Sure, the customer and revenue growth is an indicator of whether you're on to something and can validate that you have found some form of product-market fit. However, your customers are more helpful than a reference call or a singular number on your P&L. They're tangible assets for your business, and they can help you access capital. 

A CUSTOMER WHO OWES YOU MONEY

The strongest indication that a customer loves your product is when they agree to buy it. However, not everyone pays you as soon as the product or services have been delivered. This is especially true for larger customer payments. But having an invoice outstanding from a customer isn't all that bad. It's the next best thing to immediately receiving the cash. 

You may experience frustrating bottlenecks for growth by not having that cash today. Still, the amount of money that a customer owes you - or Accounts Receivable - opens up an opportunity for financing. Financiers can advance the funds with the customer's prospect of paying you shortly. Additionally, you've already delivered the goods or services and have a legal claim to payment from the customer. This short wait before payment, and the legal claim, provide financiers comfort that they'll get their money back. 

These arrangements typically come in two different forms:

1. Factoring

   This is selling an individual customer payment at a discount.

   1. Example: You receive $40k today from a financier on a customer account that expects to pay $50k in 90 days. Once the customer ultimately pays the full $50k, the lender will keep a fee and return the rest to you.

2. Accounts Receivable Line of Credit

   The financier provides a % of all payable Accounts Receivable payments.

   1. Example: You have $1M in expected customer payments. The lender provides you with 80% of your Accounts Receivable ($800k) as a buffer if some customers don't pay. The amount you can borrow changes based on how much is owed to you in Accounts Receivable. The financier charges you interest for the amount that you borrow.

Indeed, there are instances in which customers never pay. It can create some issues for your company depending on how your arrangement is structured. Financiers will try to mitigate this risk by only giving you money based on customers who are more likely to pay. However, if the customer doesn't pay, the business may be held responsible for making sure the capital gets paid back to the financier.

There are some situations where the lender takes all the risk of a customer not paying – such as a non-recourse factoring agreement. But these arrangements can be expensive to the business and should only be used if you genuinely need to accelerate customer payments.

Accessing financing based on your Accounts Receivable is nothing new. Countless capital providers are doing this – including the most conservative financiers: banks.

A CUSTOMER WHO'S EXPECT TO CONTINUE PAYING YOU

The proliferation of subscription and recurring revenue businesses has changed the way financiers think about leveraging customer relationships to provide capital. 

Many businesses with recurring revenue have little-to-no Accounts Receivable because customers pay at the time of service or, even better, pay in advance. While you haven't already rendered services, the ongoing payments from customers can provide confidence that you can pay back the financing amount. The two major indicators that give the financier comfort are the legal claim on the payments and your ability to keep them as a customer. 

The stronger your claim on future payments, the easier it is to convince a financier to provide funding. Any agreement that contractually requires the customer to pay for some time can help convince a capital provider that payments will continue. Regardless of whether or not they sign a contract, you'll run into problems if they don't renew or decide to cancel. Customer Churn - the loss of paying customers - can create a problem for paying back the financing. Using financing based on ongoing payments from customers who only stick around for a short period can feel like putting water into a leaky bucket. 

If you do have the predictability of ongoing revenue, there's been a rise in financial options for your business. Banks and independent financiers have been crafting new products to fit recurring revenue, business models. A couple of examples:

1. Revenue-Based Financing

   Instead of set payments, companies pay a fixed percentage of ongoing revenues. The payments increase and decrease based on business revenue. These payments continue until the initial amount, plus a multiple (also known as a cap), is repaid.

   1. Example: You receive $100k from a financier and agree to pay 5% of monthly revenues until you pay back a total of $150K.

2. Recurring Revenue Line of Credit

   A financier provides a multiple of your monthly recurring revenue.

   1. Example: You agree to a 3x multiple with the financier and access a $1.5M line of credit. This is based on 3x your $500k in monthly recurring revenue. This changes each month. The financier charges you interest for the amount you borrow.

Both options can be significant non-dilutive capital for your business. RBF can be beneficial for companies nervous about signing up for specific monthly payments. But paying a fixed percentage of revenue can have negative implications in certain situations. The larger the business gets, the larger the payments become. If you're rapidly growing and pay back the financing in a short time, the capital could be expensive relative to other financing options.

A CUSTOMER WHO MAKES A FINANCIER NERVOUS

While certain customer relationships can help you woo a capital provider, some customers can make them nervous. As a result, financiers typically structure the financing to contemplate or exclude these types of customers:

• International Customers

• The law and complexity of international payments can create concerns depending on the country.

• Customers That You Owe

• Financiers are giving you money expecting to get cash in return. If you ultimately have to pay the customer, that payment could decrease the lender's chance of getting paid.

• Concentration

• Customers who make up a large portion of your revenue can cause concern if the financier relies heavily on a few customers to pay. (Note: factoring is a good option here).

• Procrastinators

• If your customer has taken longer than 90 days to pay or has a history of waiting a long time to pay, financiers may choose to avoid the rollercoaster of waiting to see when the customer decides to pay.

These aren't absolute rules, which doesn't mean these aren't great customers. Each financier has its tolerance to each element, but they all introduce a bit more risk.

CUSTOMERS HELP YOU GET MORE CUSTOMERS

While they might not be as evident as large buildings or valuable equipment, the relationships you build with your customers are the most valuable asset you have in your business. Not only is the revenue a non-dilutive funding source you can turn into profits, but the customer relationships behind that revenue can also unlock all kinds of financing options for you as your business grows.

Happy customers building a foundation for many financing options to fund getting more new satisfied customers is our kind of virtuous cycle.