Entrepreneurship, Second Edition

11.8. Obtaining "Financing" from Customer Prepayments

Some companies are actually financed by their customers. This situation typically occurs on large, complex, long-term projects undertaken by defense contractors, building contractors, ship builders, and management consulting firms. These companies typically divide their large projects into a series of stages and require payment as they complete each stage. This significantly reduces the cash they require, compared with firms that finance an entire project themselves and receive payment on completion. In some companies, customers pay in advance for everything they buy. Many mail-order operations are financed this way.