As a small business owner, you’ll spend a lot of your waking hours worrying about cash flow. Meeting your debt obligations, paying off costly overheads and simultaneously attempting to reinvest and develop your business are all crucial to your future success – and so if sales begin to falter, you could run into a bit of trouble.
According to researchers at CB Insights, 29% of start-ups fail because they’ve suffered a cash crisis. If you’re keen to prevent your company from running into a similar fate, it’s worth exploring various ways in which you can source some additional cash that can keep you afloat. One of the easiest ways to generate that extra cash is by establishing a steady source of passive income.
Not familiar with the idea of passive income? Don’t worry. This guide will explain all the basics of passive income, along with several of the top passive income streams you can use to help your company.
What is passive income?
Simply put, passive income is income that you or your business can earn without active involvement. If that sounds a little too good to be true, there is a bit more to it. Some forms of passive income do require a single or several early bursts of intensive effort, which are followed by long periods in which you do not need to exhibit much (if any) effort to maintain a particular level of cash flow.
Passive income methods do not include earnings from wages, active business participation, dividends, interest or capital gains. They’re typically slow dripping sources of incremental revenue that business owners keep in a separate savings basket – and normally save for a rainy day.
So, why create passive income streams?
No matter how much faith you have in your company’s product line or in your own abilities, it’s never a good idea to place all your eggs in one basket. Encroaching competition, a staffing shortage or unforeseen market catastrophe all have the ability to shake your sales. And sometimes, it can only take one bad month of sales to set your company back 12 months.
By exploring and setting into place various passive income streams, you’ll be able to mitigate these threats. If you do run into trouble, your passive income may even be able to prevent you from needing to dip into other company emergency funds or rely on credit to stay afloat.
Passive income means financial independence. Best of all, some income streams can actually be used to complement your existing products or services and solidify your company’s brand reputation – all while earning you a bit of useful money on the side.
What is affiliate marketing and how can I use it?
One of the most common forms of passive income for small businesses is to get involved with affiliate marketing.
Affiliate marketing is a kind of trading partnership in which your business can sign a deal with another company to sell or promote their products. Affiliate marketing deals vary greatly in scale and necessary levels of effort. On one end of the scale, you could be registering your company as an official selling point for an external brand. Meanwhile, on the other end of the scale, you might simply agree to post a link to a particular product line to your social media followers.
To be clear, a desire to get involved with affiliate marketing doesn’t mean your company needs to start selling the products of your competitors. But if you do a bit of research, there are going to be plenty of brands out there offering services that complement what your business does without presenting any real threat in terms of direct competition. Those are the brands you want to be forging partnerships with.
But if you’re wanting to start small and test the waters before you dive into a major agreement with another company, you could instead leverage your existing web presence to make a small – but steady – passive income stream online.
In 2015, Google AdSense paid out nearly $10 billion to its affiliate publishers for displaying advertisements on their websites. Best of all, the AdSense programme is incredibly simple. If you own and operate your own website, you can apply to join the AdSense network.
If your application is accepted, you’ll be invited to choose the sorts of online advertisements you might be willing to display to visitors of your own website. You can select the sizes of adverts, how often they’ll appear and, to a limited extent, the subject matter. After that, all you’ve got to do is cut and paste a bit of code onto whichever pages of your website you’d be willing to let visitors see an ad.
From the moment those advertisements appear to site visitors, your company will start to receive tiny amounts of money every time a person on your website clicks that ad. As long as your company regularly maintains its website and adds new and engaging content regularly to create traffic, this type of affiliate marketing requires absolutely no effort.
If you’re after something a bit more targeted, you can even approach a brand you’d like to be affiliated with, to see if they’d be willing to compensate you for displaying one of their advertisements on your site – you can often come away with higher levels of income by striking deals of this nature individually, but they require a bit more effort.
Why should my business create digital products?
Another fantastic way of generating passive income for your business is to create a digital product that you can make available for purchase online. You do not need to be a digital expert to do this, and you don’t need to be running a company that would normally produce digital products online. There are plenty of platforms out there to assist you, and the benefits of producing a digital product can be staggering.
So, what is a digital product?
For the purpose of generating passive income, the sort of digital products companies normally produce include e-books, apps for mobile consumption or podcasts driven by ad revenue. The idea is to utilise your team’s existing knowledge or expertise, and then subsequently share that expertise via a cheap and readily accessible platform others can purchase and utilise.
So, if you run a café that sells baked goods, why not publish a recipe book online? If you own an accounting partnership, create digital learning products companies can pay for to learn how to keep track of their finances. If you operate a retail sporting goods store, start an online podcast about sports fixtures and charge other businesses a small amount to advertise on your programmes.
It’s worth pointing out that creating a quality digital product is not normally considered a passive activity. After all, if you’d like to create an e-book that people are willing to pay you money for, you’ll need to put a lot of thought and hard work into the creation of that book. Likewise, designing a quality company app can take a lot of time – and if you haven’t got digital expertise from within your company, you may need to hire an external agency to assist you.
After the creation of your digital product, you’ll then need to consider how you plan to deliver your content and then market it to users. But if that sounds like a lot of work, don’t stress. There are platforms that can automate the vast majority of this process for you.
For example, Amazon’s Kindle Direct Publishing (KDP) is an incredibly fast and easy way to self-publish an industry-specific e-book on Amazon. After producing your book, you can upload onto KDP within minutes – and then your book will start to appear in Kindle stores across the globe within 48 hours.
This platform is particularly good for business owners because it enables you to earn up to 70% royalty on sales made to customers in the UK, US, Canada, Germany, India, France, Italy, Spain, Japan, Mexico, Brazil, Australia and more. By publishing with KDP, you also control your own rights, get to set your own list prices and you can make changes to your books at any time.
After writing your book and uploading onto KDP, you don’t need to worry about marketing or promotion. Amazon takes care of everything for you, and you’ll receive your portion of sales if and when they come in. That means if your book performs well, you can expect a constant trickle of passive and indefinite income for your efforts.
That being said, you don’t necessarily need to rely on an external platform to sell your products. If you already operate an e-commerce site, you can simply add downloads of your digital products to your website. If you do this, you’ll get to keep 100% of the profits instead.
What is P2P lending and how could my business be using it?
If you’ve got some cash to spare in the short-term, your company could also explore peer-to-peer (P2P) lending as a passive income stream.
P2P lending has experienced a huge surge in popularity over the course of the last decade. The process sees business owners make a lending agreement with another company or individual via a third-party intermediary. So long as you do your research and perform due diligence, you’ll find these platforms are incredibly secure and professional. If you’re on the hunt for a good place to start exploring P2P lending, LendingClub is one of the more popular.
Most P2P loans are under £30,000 – and although the parties involved can select various terms to guide repayment, registered lenders can normally expect to recoup a return of about 12% of the amount they give to borrowers.
That being said, P2P lending is a pretty high-risk method of generating passive income. That’s because, although the majority of P2P sites or regulated and secure, the loans your company will be asked to offer peers will be unsecured. In turn, you run the risk of default if your borrower fails to make their payments.
You shouldn’t necessarily let that risk put you off checking out P2P lending. One of the best ways to mitigate the risks associated with lending is to diversify your lending portfolio across P2P platforms. That means lending only small amounts to companies across a range of industries. In turn, you don’t have a whole lot to lose, but you’ll be able to enjoy a small but steady stream of constant income from borrowers.
The bottom line
At the end of the day, passive income does require a bit of effort – and the more effort you’re willing to put in, the more income you’re likely to generate. But even simple passive income streams can prove to be a welcome boost in terms of generating cash for your business.
Whether it’s relying on your business expertise to produce an informative e-book or setting up a podcast relevant to your business activity, the development of digital products can offer your company a steady trickle of online sales. Meanwhile, affiliate marketing, the publishing of online advertisements or P2P lending platforms enable you to make as little or as much additional revenue for your business as you like.
The best part? The successful deployment of these passive income streams can go on to strengthen your brand reputation and solidify other aspects of your business. You haven’t got much to lose by getting your company involved in passive income streams – but you’ve got a whole lot to gain.