Options for growing your business when funding is tight
Taking your business to the next level can require a significant investment if you plan to do it all yourself. The good news is that there are less capital-intensive options that you can consider if finances are tight. Options like outsourcing production or entering joint ventures can allow your business to grow without a significant capital outlay.
On this page:
- Outsourcing production
- Licensing and royalty agreements
- Distribution agreements
- Joint ventures and strategic alliances
Outsourcing production
If you lack the funds to manufacture your product yourself, it might pay you to subcontract or outsource the process instead. In many cases, it makes little sense to buy expensive equipment when an established manufacturer could undertake the work. Generally, larger or faster machines and specialist operations can produce the goods far cheaper than you could hope to do yourself, and it might even be better to produce the goods (such as clothing or shoes) offshore.
If you find reliable people to work with you, it is also possible to outsource or subcontract the provision of certain services.
Licensing and royalty agreements
Another possibility to license your product – this could be a global licence or specific to a geographic area. The licensee will manufacture the goods and you’ll receive a royalty payment on each sale. This solution is more suited to businesses that have patented or protected products, brands, trademarks or intellectual property with strongly marketable properties.
Like subcontracting, the arrangement sidesteps the need to find development capital for plant and equipment. In addition, it also eliminates the need for you to market the products or services to global markets.
Suppose you have, for example, invented and copyrighted a board game. You are convinced that your board game is novel and highly attractive to the 10- to 15-year-old market. You’ve manufactured a few prototypes, but this and the whole development and market research process has taken you two years of work and all your savings.
You might think your ideal course of action would be to raise enough funding from outside investors to manufacture and distribute the product. This would mean doing everything from scratch, including building the manufacturing capacity and building marketing distribution channels.
A more realistic option might be to license your board game to a specialist games manufacturer. This recognises that board games are a specialist market dominated by a few top games manufacturers with established international distribution channels and many years of marketing experience in the industry. If you were to get your game accepted and licensed by a major player in the industry, you could gain substantial sales at a fraction of the time and cost it would take you to build your own marketing and distribution channels.
Distribution agreements
An alternative to licensing your product or service is to look for an established distributor. Here, you have to weigh up the practicalities and costs of trying to establish distribution channels yourself against finding a distributor who already has established distribution channels and sales representatives in the field.
If you’re looking to distribute your product or service overseas, then the advantages of using established distributors becomes even more apparent. Forming the right alliance with an overseas company could help you get valuable exposure and a short-cut into international markets that might otherwise take you years to achieve. The alliance could also help you overcome trade barriers. Similarly, teaming up with businesses that have developed different channels of supply and distribution can help to grow your business quickly.
Joint ventures and strategic alliances
Strategic alliances and joint ventures can be excellent ways of stretching and leveraging the finances and resources of your business. Note that subcontracting (already discussed as a possibility) can often, in effect, be a form of strategic alliance, especially if you develop a close working relationship with the supplier. Often such businesses will grow in tandem.
There are several advantages to forming joint ventures and strategic alliances.
- Sharing the costs and risks of development. If your funds are limited, then establishing a joint venture or strategic alliance with a complementary business can be an excellent way of sharing the costs and reducing the risk and financial exposure of research and development or growth. For example, the cost of specialised technology can be shared with your business partners.
- Pooling resources and skills. Joint ventures and strategic alliances can give you access to skills that you might otherwise be unable to afford. You might not, for example, have the funds or resources to finance some expensive equipment needed to build a prototype, or to put your prototype product into production. The solution might be to form a strategic alliance with a company that has the necessary equipment or resources.
- Exploiting synergies. Choosing the right strategic or joint venture partner allows you to tap into a pool of expertise and talent, where the result is greater than the sum of the parts. The adage that two heads are better than one also holds true for businesses pooling their ideas and resources.
- Sharing marketing and distribution costs. Joint ventures and strategic alliances allow you to share the costs of bringing your product or service to market. This can be particularly advantageous for a small start-up business partnering with a larger and more established business with established marketing and distribution channels, strong marketing skills and experience and a large database of customers.
- Building credibility and competitive advantage. Strategic alliances and joint ventures can play an important role in helping you create both depth and competitive advantage in your business. By featuring the logos of your strategic partners on your stationery, brochures and promotional material, you’re increasing your credibility in the eyes of both customers and potential lenders.
It pays to keep thinking about possible strategic alliances with businesses that offer skills, knowledge, resources, or products and services that complement your own.
- This information is provided by New Zealand Trade and Enterprise
