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.

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