Editor’s note: This article was first published in September 2012, during the Spanish credit crunch. Its remarks on public aid for entrepreneurs taking 6 to 12 months, the lump-sum unemployment benefit requirements and promissory notes being distrusted even by experienced investors reflect that moment.
There’s actually quite a lot of aid available for starting a business. The problem is that what I personally consider help for entrepreneurs isn’t exactly what’s on offer, because most of these schemes, on top of endless red tape, usually arrive after 6 or 12 months, forcing entrepreneurs to use their own money at first, even if they have to go into debt. Sometimes the aid arrives when the business already has debt problems and hasn’t been able to invest what it needed to get properly set up.
So far, the best help for starting a business, in my view, is capitalising your unemployment benefit as a single lump-sum payment, although once you read the small print, that also needs some thought because of the requirements. Faced with these difficulties, this is where a financing system that has started to grow during the crisis comes in: so-called solidarity bonds, through which the entrepreneur receives the money before opening the business and so has more room to manoeuvre. We explain what they are and their advantages and disadvantages.
What are solidarity bonds?
We’ve all heard of promissory notes, where someone buys a note and receives interest in return. The problem is that, when money is involved, the person who buys the note knows they could lose it if the business doesn’t do as well as it should. What’s more, promissory notes currently raise suspicion even among the most experienced investors.
With solidarity bonds, the entrepreneur issues coupons and sells them to future customers. In return, the customer won’t get money back later; instead, they can use those coupons to buy the business’s products at a more attractive discount.
Advantages and disadvantages
You could say it’s all advantages, for both the customer and the entrepreneur, since the only drawback could arise if the entrepreneur doesn’t organise these coupons properly.
The main advantage is that this financing system gives the business immediate liquidity. In addition, the entrepreneur doesn’t have to pay any interest on that money. Quite the opposite: certain sales are already guaranteed, even if at a bigger discount.
This product is very easy to sell to friends and family, since the coupons can range from €50 to €2,000 (depending on what your business sells), and also to potential consumers of your product or service.
Even so, it has to be done properly to avoid problems later on. You need to make it clear when the coupon can be used, because if all your customers came in the day after you opened, they’d clear you out of stock and you’d already have your first problem.
To do it properly, issue coupons with set redemption dates so that they are redeemed gradually.
Beyond that, it’s an excellent way to self-finance, because it creates a clear benefit for both the entrepreneur and the customer, guarantees you an initial turnover of stock and, along the way, wins you a customer base before you even open.
Further reading
Featured image: André Hofmeister, CC BY-SA 2.0, via Flickr.
