Question

Describe four examples of customer funding used to reduce financing needs using real world businesses. Discuss their viability in successfully running the business (Max 400 words).

Answer 1

1) Capital-intensive industries such as Real-Estate - Real-Estate companies are known to take advances from customers if the project is under construction. Payment schedules could be linked to the progress of the construction. This reduces the dependence on banks for financing. However, this also entails more stringent regulations to ensure that funds are not diverted for other purposes or projects

2) Matchmakers - With the advent of internet and social media sites, many matchmakers such as AirBnB, Amazon, Uber etc. ensure optimimum utilization of resources. They match demand and supply across geographies. Customers pay upfront fees and charges to the intermediary who then transfersto the vendor or service provider after deducting a commission.

3)Subscription model - Customers make a fixed regular payment to the service providers irrespective of the usage of service. For instance, Netflix.

4) Demand based production - This route has become popular recently due to the onset of pandemic. As a result of scarcity of resources and liquidity, many manufacturing companies are resorting to production based on confirmed orders and advances from customers. This method is opposite of what most of the companies are used to, which is - inventory based production. In normal times, manufacturing companies would produce inventories based on forecasted demand and retain a minimum level of stock for future sale. However, many companies have realized that this is no more a viable option given the current circumstances.

The above examples aid in creating a negative working capital cycle, and reduce reliance on external financing. However, applicabiltiy of this would differ from industry to industry, depending on demand and supply situations.