Need to raise capital for your business? Maybe try a strategic alliance instead.

I heard a great story the other day about a small business that needed to raise capital to grow.

The business was a small operation in the speciality food industry. The business owner, let’s call him Jim, wanted to raise money primarily so that he could get the food made in decent quantities in a factory (he was doing it all at home) and he also wanted some cash to finance the hiring of a sales professional and some marketing assistance.

The necessity for funding was getting urgent. Jim had already borrowed heavily from family and friends and despite a valiant attempt at raising angel investment, no one had shown the slightest interest in buying into the business. Jim was at his wits’ end and was about to call time out on the business.

By chance Jim bumped into Martin, a food manufacturer and commercial property investor, at a social event. Jim had previously spoken to Martin about investing cash in the business but Martin had said that it wasn’t his game, and that he would rather invest in property than small business. Martin had however remembered the conversation and asked Jim how the capital raising was going. Jim was honest and told him that the situation was pretty desperate.

A few days later Jim got a call from Martin. Martin wanted to put a deal to Jim. Jim jumped into his car and dashed around to Martin’s place deliriously excited, believing that at last someone was going to put a cash injection into the business.

But Martin wasn’t talking about cash. Martin had recently bought a new factory that had surplus operating capacity. His deal was this: Martin would do all Jim’s manufacturing at a proper commercial rate but he would give Jim credit terms of 150 days and he would also do the purchasing of raw materials for Jim so that Jim could get access to Martin’s very valuable bulk discounts.

Jim left Martin’s place a little despondent. He needed cash not a manufacturing deal, or so he thought. But after mulling it over, talking to a few people and getting some help running the numbers he realised that he had been offered something way better than a few dollars in his bank account and that this was, actually, a fantastic deal.

Jim’s business is now a year into the deal with Martin and things are looking good. Yes the first few months were a bit tough, but the cashflow from the first few big deliveries financed the much-needed sales and marketing help, and by the time Jim needed to pay the Martin’s first invoices he had some decent revenue under his belt.

Talking recently to Jim he made this observation about raising capital. He said that everything he had read about starting and growing a business had emphasised ‘raising capital’ and so it had not crossed his mind to think of alternatives. He now realised that the strategic alliance with Martin was the type of deal he should have been looking for all along and that it fitted with his business way better than a cash injection.

I would second that. Business owners who need help expanding rarely explore proper strategic alliances with businesses big enough to offer them some support. If you are looking for capital, challenge yourself. Is there another way?

Julia Bickerstaff’s expertise is in helping businesses grow profitably. She runs two businesses:Butterfly Coaching, a small advisory firm with a unique approach to assisting SMEs with profitable growth; and The Business Bakery, which helps kitchen table tycoons build their best businesses. Julia is the author of “How to Bake a Business”  and was previously a partner at Deloitte. She is a chartered accountant and has a degree in economics from The London School of Economics (London University).