London Business School’s enterprise expert,John Mullins says:
Experts suggest that the economic growth ahead of the World Expo 2020 represents tremendous opportunities for small businesses in the UAE. As an increasing number of expatriates and visitors are flocking to Dubai and the government is investing US$8 billion in infrastructure, entrepreneurs can leverage these opportunities by scaling up operations to meet rising demand.
However, the availability of finance remains a cause of concern for small businesses. According to the latest industry figures, SMEs represent almost 92 per cent of the UAE’s total registered companies, yet receive only three per cent of the total loans given by banks.
In the face of such borrowing challenges, SMEs must explore new strategies to raise funds.
Businesses can reduce dependence on banks and other investors by using their customers’ cash to finance new or existing enterprises. Customer-funding involves having customers’ cash in hand before having to produce or pay for the goods or services a business sells. Inventive, creative, and motivated entrepreneurs carefully identify potential clients and get paid in advance to fund product development and supplier costs.
The benefits of customer-funding are far more than just the freedom from heavy loans and interfering investors. Entrepreneurs must realise that their top priority – at least during the early days – is to find paying customers, not to raise capital. This approach redirects business owners’ focus away from the enticing allure of investors and toward their customers.
Moreover, winning new orders often gives customers a vested interest in the business’s success early on. Once a business has customers, investors – if needed at all – will surely follow.
If start-ups ring the cash register early enough and often enough, they will have the magic of customer traction – and the funding – they need to get their fledgling businesses off the ground.
John Mullins is an Associate Professor of Management Practice at London Business School and author of The Customer Funded Business: Start, Finance, or Grow Your Company with Your Customers’ Cash.