There are several potential financing options for companies with tight funding for healthy doses of working capital. Bank loans or lines of credit are usually the first choice that the owner considers - this may be the best option for eligible companies.
In today's uncertain business, economic and regulatory environment, the eligibility of bank loans can be difficult – especially for start-ups and companies that have experienced any type of financial difficulties. Sometimes, the owner of a business that does not meet the bank loan conditions decides to seek venture capital or introduce equity investors is another viable option.
But are they really? While there are some potential benefits to bringing venture capital and so-called "angel" investors into your business, there are some drawbacks. Unfortunately, the owner sometimes does not consider these shortcomings until the ink contract with the venture capitalist or angel investor has dried up - and it is too late to exit the transaction.
Different types of financing
One problem with the introduction of equity investors to help provide working capital is that working capital and equity are actually two different types of financing.
Working capital - or funds used to pay for the business expenses incurred by the time lag collected in sales cash [or accounts receivable] are of a short-term nature and should therefore be financed through short-term financing instruments. However, equity is often used to finance rapid growth, business expansion, acquisitions or purchases of long-term assets, which are defined as assets that are repaid over a 12-month business cycle.
However, the biggest disadvantage of introducing equity investors into your business is the possibility of losing control. When you sell equity [or stock] in your business to a venture capitalist or angel, you give up a certain percentage of business ownership, and you may do so when it's out of date. Because of this dilution of ownership, the most common is the loss of control over some or all of the most important business decisions that must be made.
Sometimes, because there is little [if any] out-of-pocket use, the owner is tricked into selling the shares. Unlike debt financing, you usually don't pay interest through equity financing. Equity investors receive returns through the ownership of the shares acquired in your business. However, the long-term "cost" of the sale of equity is always much higher than the short-term cost of the debt, whether it is the actual cash cost or the soft cost, such as the loss of control and the value of the company's management and the potential share of future sales.
Alternative financing solution
But what if your business needs working capital and you are not eligible for a bank loan or line of credit? In this case, alternative financing solutions are often suitable for injecting working capital into the business. The three most common types of alternative financing used by such companies are:
1. Full service factoring - from
The company continues to sell outstanding receivables to commercial finance [or factoring] companies at a discounted price. The factoring company then manages the receivables until it is paid. Factoring is a mature and acceptable method of temporary alternative financing, especially for fast-growing companies and companies with concentrated customers.
2. Accounts Receivable [A / R] Financing - from
A/R financing is the ideal solution for companies that have not yet financed but have a stable financial position and a diverse customer base. Here, the company provides detailed information on all accounts receivable and promises to use these assets as collateral. The proceeds from these receivables are sent to the lockbox, and the finance company calculates the base of the loan to determine the amount the company can borrow. When the borrower needs funds, it makes a request for advance payment, and the finance company uses a certain percentage of accounts receivable prepayments.
3. Asset-based loans [ABL] - from
This is a credit facility secured by all of the company's assets and may include A/R, equipment and inventory. Unlike the factoring business, the business continues to manage and collect its accounts receivable, and continues to submit mortgage reports to the finance company, which will review and periodically audit the report.
In addition to providing working capital and enabling owners to maintain business control, alternative financing can provide other benefits:
- It is easy to determine the exact cost of financing and increase it.
- It can include professional collateral management, depending on the type of facility and the lender.
- Real-time online interactive reporting is often available.
- It can provide more money for businesses.
- It has the flexibility to fund the needs of the business.
It is worth noting that in some cases equity is a viable and attractive financing solution. This is especially true in the case of business expansion and acquisitions and new product launches - these capital requirements are often not suitable for debt financing. However, equity is usually not the appropriate financing solution to address working capital issues or help fill the cash flow gap.
Precious goods
Remember that business fairness is a valuable commodity and should only be considered when appropriate and at the right time. When seeking equity financing, ideally this should be done when the company has good growth prospects and huge cash demands for this growth. Ideally, the majority stake [and therefore absolute control] should remain at the company's founder.
Alternative financing solutions such as factoring, A/R financing and ABL can provide working capital and drive many tight-funded businesses that do not meet bank financing needs - without diluting ownership and possibly abandoning business controls when the owner is out of date. If these companies become financing in the future, it is often easy to transition to traditional bank credit lines. Your banker may recommend you to a commercial finance company that can provide the right type of alternative financing solution for your particular situation.
Take the time to understand all The different financing options available for your business, as well as the pros and cons of each, are the best way to ensure the best choice for your business. Using alternative financing can help your company grow without compromising your ownership. After all, this is your business - shouldn't you keep it as much as possible?
Orignal From: Alternative financing and venture capital: Which option is best for raising working capital?
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