Category Archives:MLM startup capital and funding

10 Steps Towards Launch! Part 10 - Money

The following is the last segment of our 10-part series entitled “10 Steps Towards Launch!” by Terrel Transtrum, President/Founder of ServiceQuest. If you are thinking about starting a new direct selling company, contact us today!
 
The last of ten business segments addressed in the ServiceQuest system for evaluating “launch readiness” is MONEY.  Money and MLM, as in any business, go hand-in-glove.  Here are the best practices to help you determine how prepared you are for launching a successful MLM business.
 

  • Set up Accounting Software that Integrates with your MLM Software and Technology Systems
  • Determine your Capital Requirements for Achieving Launch and Positive Cash Flow
  • Implement Business Controls to Assure Safety and Continuity
  • Create the System for Classifying and Tracking Information Essential for Taxes
  • Pay Close Attention to Commission Payments and Supporting Systems
  • Implement Payroll and Employment Tax Systems
  • Create the Systems for Banking, Treasury and Risk Management
  • Start Early to Set Up the Payment Gateway Systems
  • Set up Your Commission and Payment Processing Accounts

 
Here are examples of descriptions that you might write for your MLM Launch Best Practice:
 

  1. Commission Payments – We have in place the technology for reporting and paying commissions to distributors / consultants, integrated with the commission processes of our enterprise software and accounting software.
  2. Business Controls – The basic business controls are set up to form the information link between business activities, accounting, and commissions.  These include procedural standards, source documents, money-handling systems, documented systems, and approval processes.
  3. Payment Processing Account – We have acquired a Tax ID number, we have our website in place (e-commerce capable), and we have opened a business checking account and have a favorable credit history so that we can successfully apply for a merchant account.


Money is the lifeblood of your MLM business.  Careful preparation and planning will be the key to starting and running a successful MLM. For more information, contact Terrel Transtrum terrel@launchsmart.com

How Much Does it Cost to Launch an MLM

One of the regular phone calls we receive is from people who ask how much does it cost to launch an MLM?  This article provides an overview of the important questions to help you determine the answer to this question:

  • What is the mix of products and services that you will sell?  How much research remains for you to have your MLM products and services ready for market?
  • Do you plan to support your enterprise with hosted MLM software or are you planning to build your own?
  • Do you expect to work with an MLM compensation plan expert or will you create, test, and write the programming specifications yourself?
  • Do you require the services of an MLM consultant, an MLM law firm, an MLM compensation plan design team, or an interim head of sales, and if so, how much will you budget for these services?
  • Are you in an existing location from which you can operate do you need to secure and prepare office space?
  • Will you be picking and packing orders, and if so, do you require warehouse and fulfillment systems (regardless of how small or grand)?
  • Will initial workers be unpaid family and friends or will you be paying them wages?  What is your budget for labor costs until the business is cash flowing?
  • Will you require forms, brochures, and other documents?  If so, do you have a budget for creating the templates, writing the copy, and printing them?
  • Will you design a starter kit, catalog, or other marketing collateral?  What is the plan and budget for creating and producing these?
  • Do you plan to implement a web marketing strategy that incorporates search engine and social media strategies for presenting your company to the world?
  • Do you have existing equipment to use in the business, and if so, what is its value?  What additional equipment will you need to acquire?
  • What is your budget for the launch event, travel, and costs associated with the early recruiting efforts?
  • Are you able to identify other unique expenses and capital expenditures for your company?

Early worries can be eliminated by completing a launch and operating budget .  If you don’t have one, contact us and we’ll get into our toolbox for you.  As you work through this important area of budgeting and planning, don’t focus on timing as much as the actual planning of expenditures to start selling products and recruiting and supporting MLM distributors.  With some careful thought and focused homework, you can determine how much it will cost to launch your MLM.

Sources of Capital for MLM Startup

There are two basic types of financing for MLM startups: equity and debt.

Debt financing is an interest-bearing loan, the cost of which has no direct relationship to your business’s sales, profits, or future growth.  Instead, the cost of money is determined by the terms of the loan – interest rate and term of the loan.  Equity financing exchanges ownership for capital.  The investor looks for a future return through ongoing participation in profits and the eventual score that may come to them when the company goes public or is acquired.  For instance, the Home Party Plan company Silpada started from idea, and with unwavering commitment to quality, ken focus on its market niche, and relentless and tireless persistence, it became a small empire that AVON reportedly purchased for $650 million in cash in 2010.   In the current economic climate, we have seen some interesting and creative arrangements involving mixes of debt and equity as funding for MLM.  Thus, especially in these challenging times, debt and equity MLM funding are not mutually exclusive.

Here are some of the more common sources of MLM capital that often fit the MLM funding strategies:

Internal financing. In your business planning and in running your business, don’t overlook four important sources of internally generated capital for funding MLM growth.

  • First, make sure you collect your accounts receivable (your income) as quickly as you can.  For MLM funding, this is routine except in a few rare models where the product / price mix demands financing arrangements (such as Enagic water systems or Quantumwave health lasers).
  • Second, optimize trade credit by seeking out vendors and suppliers who will give you the longest possible payment periods.
  • Third, improve your inventory turnover and MLM forecasting.  Simply stated, inventory that sits in the warehouse is not earning anything and is tying up cash.  Inventory that turns over more rapidly ties up less money and generates income more quickly.
  • Fourth, consider leasing versus buying and subcontracting tasks versus doing things in-house.

Private investors. You can approach people you know very well to request starting capital for MLM, and even those you might not know as well, to invest money in your business.  Investors may be passive or active.  Passive investors desire less involvement in the day-to-day operations of the business, whereas active investors desire more involvement in the day-to-day operations of the business.  Private investors are almost always equity financers, although sometimes your arrangement with them will also include debt financing.  In our adventures to assist with MLM growth analysis and helping clients obtain funding for MLM startup, we have seen deals that involve equity and debt in the following basic model:

  • The client attracts startup capital for MLM by offering equity
  • The investor responds by requiring a controlling interest
  • The client offers these conditions: (a) controlling interest of 51% of which 26% or 36% or even 46% is returned to the client upon (b) the timely achievement of growth and profitability milestones, and (c) repayment of the amount funded, without interest.  In essence, the investor’s risk is both covered as well as compensated, and they remain a stakeholder but hand back control as the company proves its capabilities.  For more insights and strategies, including a thermo-nuclear, ironclad Private Placement Memorandum (PPM), contact us at the LaunchSmart offices.

State and Local Development Agencies. Your state government, local community, and universities may have economic development or business development organizations who may provide MLM budgeting, MLM budgeting services, MLM financial analysis, and MLM growth analysis in support of obtaining startup capital for MLM.  These organizations can be an excellent source of information for locally available low-interest loans and even business grants for those looking for help on how to fund and MLM startup.  Sometimes these organizations actually manage their own investment funds

Commercial Bank Loans. Commercial banks offer several types of loans, although today’s climate has chilled support of MLM funding and MLM startup capital:

  • Lines of Credit – The bank makes available a certain amount of money.  You draw out funds as you need them.  Interest is generally charged only on the funds drawn.  Sometimes the bank requires the line of credit to be periodically paid down or even paid off (for example, once a year), after which the line of credit can be used again.  We are finding the best scenarios here are when the company has a track record and the funds are secured by inventory and assets with ample revenues and margins to keep the bankers comfortable.  It’s a tough game, although some still play it in support of MLM forecasting and funding.
  • Straight Commercial Loans – The bank loans money for a period of less than 90 days, after which the complete loan plus interest, is repaid.
  • Character Loans – The bank loans money for a short-term, and the loan is unsecured.  These loans are generally made only to individuals or companies of high credit standing.
  • Collateral Loans – These loans are made to individuals or companies who give security in the form of real estate, inventory, or other assets.
  • Bank Credit Cards – Although not thought of as such, the bank credit card is a source of funds.  Credit cards generally carry relatively high interest rates and should be used only for small amounts of money to be repaid quickly.
  • Term Loans – A term loan is a business loan with a maturity of not less than one year and usually no more than ten years.  Interest rates can be fixed (set for the life of the loan) or variable (vary tied to some index like Treasury Bills) and payments are made monthly.  Sometimes lower monthly payments can be negotiated with a “balloon payment” (paying off a lump some) at the end of the loan.
  • Leases – More MLM and Home Party Plan companies are turning to leases for hard assets such as office furnishings, fulfillment and warehousing equipment, hardware, and even software.  A good example is eLease (www.elease.com) who leases from $5,000 to hundreds of thousands of dollars.

When pursuing any of these sources of funding an MLM startup, a professionally prepared business plan is a vital tool to inform the lender or investor of your credit worthiness.  Most will want to thoroughly review your business plan prior to making a lending or investing decision.  If possible, try to arrange for an oral presentation to accompany the presentation of your business plan so you can communicate your passion and vision for the business.   It is important to realize that many investors and lenders will be initially skeptical of network marketing or party plan concepts, and must be educated as to the viability of your MLM business model as they consider providing funding for the MLM startup.

Obtaining Capital for MLM

We carefully watch the requests for information on MLM startup capital, and we see a wide array of requests, that all seem to have a single focus:

  • MLM funding
  • MLM startup capital
  • MLM budget services
  • MLM forecasting
  • MLM budgeting and MLM budget services
  • MLM financial analysis
  • MLM growth analysis
  • Starting capital for MLM
  • How to fund an MLM startup
  • MLM raising capital
  • Other similar requests

There is indeed a high degree of interest and hope centered on the topic of, “where do I obtain the necessary financial backing to start and operate a successful MLM enterprise?”

To these questions, we offer insights and encouragement.  First, the encouragement.

From mid-2008 until today, we have seen the single biggest surge in the history of MLM startups.  We’re believers in the entrepreneurial spirit that drives the brave men and women into the front lines of battle.  People are starting strong MLM companies, and they are succeeding!

One of our clients launched in January of 2010, and within 90 days, they had achieved more than 2,800 enrollments into their monthly autoship program.  If you consider that most attain breakeven at our around 500 to 1,000 active accounts, you can only imagine the great relief and confidence that this company already enjoys.  And, they attribute much of their success to thoughtfully and effectively arranging the necessary MLM startup capital.  This came as a result of rigorous MLM forecasting, MLM growth analysis, and careful attention paid to how to fund an MLM startup.

We can barely keep up with the vision and determination of so many brave and visionary souls who are tireless in their MLM budgeting and MLM forecasting which assure that they have sufficient MLM funding.

Second, allow us to share some of the important insights we have gained in the journey.  In creating your forecast for MLM funding, start by giving very careful thought to the growth model, including the assumptions behind behaviors that drive MLM growth.  Since the sales model is completely dependent on the results achieved by your voluntary sales force, it follows that a close analysis of the behaviors will be the key to forecasting MLM growth and financial demands.

Thus, here are some the key considerations for MLM growth modeling and MLM financial forecasting:

  • What percentage of distributors will join your company simply to be able to obtain a favorable price on the products and services?
  • Of those who join, what percentage will introduce 1, 2, 3, 5, 8, 13, and 21 new customers and other distributors to the company?
  • What attrition percentage will you apply to your MLM growth model?  From all our years of researching retention trends, we offer a basic rule of thumb:  for Home Party Play Companies (such as Pampered Chef), distributor retention is 40% per year.  This means that of 100 distributors who join in January, 40 will still be active in December.  For MLM retention, the norm is 20%, for hosts of reasons we will explain in other articles and seminars.

In my next blog, I will share the “not-so-secret” secrets of how to raise capital for MLM startup.