What it is
Selling ahead: preorders for a new product, gift cards or store credit sold before an opening, memberships, or season shares like a farm's community-supported agriculture (CSA) box. Customers fund the project, and the sales prove people want it.
What it really costs per year
At full price it costs nothing but the obligation to deliver. A discount for buying early is the cost of the money: selling $100 of goods for $95, delivered in six months, works out to about 11% a year; $90 for goods delivered in three months is about 44% a year. Keep the discount small or the delivery soon.
How fast the money comes
As fast as you can sell: a campaign usually runs a few weeks.
Who qualifies
- Businesses selling to the public with customers who'd buy ahead: a following, a waiting list, a farmers-market crowd.
Where it breaks
- Late or missed delivery. Under the FTC's mail-order rule, if you can't ship when promised (or within 30 days if you promised nothing), you must offer customers the choice of waiting or a full refund. Store credit can't replace a required refund. Money already spent can't be refunded.
- Gift cards have federal rules (money on them can't expire for at least five years, and inactivity fees are limited), and in many states unredeemed balances must eventually be reported to the state.
- Taxes can come before delivery: a business on cash accounting generally reports advance payments when they're received.
- It rarely raises enough for a big buildout on its own.
Compare with
- Your own cash: yearly cost 0%, money in today.
- Community raises (Regulation Crowdfunding): yearly cost about 13–25%, money in 1–4 months.
- 0% crowdfunded microloans (Kiva): yearly cost 0%, money in 2–3 months.