Alternative Financing Vs. Venture Capital: Which Option Is Best for Boosting Working Capital?

There are several potential financing options available to cash-strapped businesses that need a healthy dose of working capital. A bank loan or line of credit is often the first option that owners think of – and for businesses that qualify, this may be the best option.

In today’s uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult – especially for start-up companies and those that have experienced any type of financial difficulty. Sometimes, owners of businesses that don’t qualify for a bank loan decide that seeking venture capital or bringing on equity investors are other viable options.

But are they really? While there are some potential benefits to bringing venture capital and so-called “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t think about these drawbacks until the ink has dried on a contract with a venture capitalist or angel investor – and it’s too late to back out of the deal.

Different Types of Financing

One problem with bringing in equity investors to help provide a working capital boost is that working capital and equity are really two different types of financing.

Working capital – or the money that is used to pay business expenses incurred during the time lag until cash from sales (or accounts receivable) is collected – is short-term in nature, so it should be financed via a short-term financing tool. Equity, however, should generally be used to finance rapid growth, business expansion, acquisitions or the purchase of long-term assets, which are defined as assets that are repaid over more than one 12-month business cycle.

But the biggest drawback to bringing equity investors into your business is a potential loss of control. When you sell equity (or shares) in your business to venture capitalists or angels, you are giving up a percentage of ownership in your business, and you may be doing so at an inopportune time. With this dilution of ownership most often comes a loss of control over some or all of the most important business decisions that must be made.

Sometimes, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don’t usually pay interest with equity financing. The equity investor gains its return via the ownership stake gained in your business. But the long-term “cost” of selling equity is always much higher than the short-term cost of debt, in terms of both actual cash cost as well as soft costs like the loss of control and stewardship of your company and the potential future value of the ownership shares that are sold.

Alternative Financing Solutions

But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:

1. Full-Service Factoring – Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.

2. Accounts Receivable (A/R) Financing – A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.

3. Asset-Based Lending (ABL) – This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.

In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:

It’s easy to determine the exact cost of financing and obtain an increase.
Professional collateral management can be included depending on the facility type and the lender.
Real-time, online interactive reporting is often available.
It may provide the business with access to more capital.
It’s flexible – financing ebbs and flows with the business’ needs.
It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches – these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.

A Precious Commodity

Remember that business equity is a precious commodity that should only be considered under the right circumstances and at the right time. When equity financing is sought, ideally this should be done at a time when the company has good growth prospects and a significant cash need for this growth. Ideally, majority ownership (and thus, absolute control) should remain with the company founder(s).

Alternative financing solutions like factoring, A/R financing and ABL can provide the working capital boost many cash-strapped businesses that don’t qualify for bank financing need – without diluting ownership and possibly giving up business control at an inopportune time for the owner. If and when these companies become bankable later, it’s often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a commercial finance company that can offer the right type of alternative financing solution for your particular situation.

Taking the time to understand all the different financing options available to your business, and the pros and cons of each, is the best way to make sure you choose the best option for your business. The use of alternative financing can help your company grow without diluting your ownership. After all, it’s your business – shouldn’t you keep as much of it as possible?

Brainstorming To Start A Small Business – Questions To Answer

Hello readers and potential future entrepreneurs. I understand the feeling; desire to create, operate, and succeed. Throughout my professional career, I have learned that there are numerous steps that must be taken in order to organize opening and operating a small business. I have put together a few questions which aspiring entrepreneurs should, at the very least, consider reading over. There are many questions that may arise with opening a small business, and I will address a few of those questions briefly in the following list of questions one may ask while brainstorming.What type of business do you want to open? There are various business endeavors an entrepreneur could involve themselves in. It all comes down to what knowledge one has, or is willing to obtain. Are you a restaurateur? Repairman? Plumber? Home health / assistance? Do you have experience managing or working at such establishments? Do you need formal education from an institution? Will you work as a sole proprietor, or a partner / member? Research limited liability companies (LLCs) in addition to sole proprietorships and partnerships. S corporations are another option, but they are for business with stockholders, and may not be right for your particular business application.What kinds of licensing and/or permits are required? Each business will have different licensing requirements; it all comes down to what the entrepreneur ultimately chooses to do. A restaurant would need food safety licensing in addition to basic business licensing, and if alcohol is on the menu – there is another permit the entrepreneur would need to legally sell alcohol on the premises. Repair oriented businesses would need at least the business license to repair, but if they sell parts as well, they would need to have “retail” listed on their business license in addition to “repair”. Health care services require at least formal education and licensing as an LPN, RN, or one of several other health care related licenses. Be sure to check your state’s laws to ensure what is necessary to operate your type of business.What training / education / certifications are required to legally run this business? We touched upon this in licensing / permits, however there is much more involved than the required licensing. For example, one cannot operate a vehicle collision repair business without the knowledge of performing those types of repairs. There are schools that can be attended to learn what must be learned to effectively operate nearly any kind of business. However, there are also businesses where experience is enough to operate effectively without needing any formal education (lawn care, house cleaning just to name a couple). Also, there are certifications for training in nearly, if not all, care industries.Does this business require a storefront? Retail establishments will undoubtedly need a storefront. Bear in mind, retail business will have a much larger initial investment than a service based operation. That initial investment is inventory. Some service businesses may not need a storefront to operate, as much of the service performed could very well be on-site. If a storefront is necessary, be sure to consider delivery or on-site service if it is feasible for your operation.How much will it cost? This number will vary wildly based on the type and size of business you are planning. For smaller businesses, this number could be as low as $200 for a license and/or permit, or as high as a million dollars or more. Obviously, inventory is very expensive, and so are specialized tools for performing extremely precise work. Calculate the expected opening and operating expenses. Determine what size storefront is needed (if applicable), and research local commercial realty properties, locations, and prices. It is absolutely cheaper to rent in the short-term, although the thought of owning property that is paid off is very tempting. Prices on most things will vary based on your location. Employees are another cost, if your business warrants employees. When employees come into the equation as opposed to sole proprietors or partnerships, one must add extra insurance for the business (unemployment insurance comes to mind). Check with your selected insurance company for which types of additional coverage are required, and if offering health insurance can be done reasonably. Those employees will also need to have taxes paid on their wages – part from the employee’s paycheck and part from the company. Another potential cost is repayment of loans, if you don’t already have the capital needed to open your business. Basic operating expenses are not to be forgotten, as heating/cooling, Internet connectivity, and utilities will be regular expenditures for any storefront. On-site service operations cost very little when compared to a physical storefront.How can an individual pay for this? If you do not have the funds available, which is very common, applying for loans is a way to attain funding. Be sure to have a business plan with projected expenses and revenues. There are other ways to gain funds for a business. Look into grants. While they are not very common, they are a potential source for assistance nonetheless. If many people believe in your dream, one could possibly acquire donations from those individuals.What about accounting? Bookkeeping is a necessity – research which accounting/bookkeeping software would work best for the type of business you are planning. Point-of-sale (POS) systems are needed for “ringing up” and selling inventory or goods to the customer. POS systems keep track of sales, sales taxes, employee labor dollars spent, and many other items. If you are apt at creating spreadsheets, you may be able to keep track of your own inventory depending on your particular business model.I hope this brief listing of questions and potential answers has been of assistance to aspiring entrepreneurs. Although there are countless successful entrepreneurs who have little or no formal education in business, it is never a bad idea to research courses regarding administration and management. Be sure to take a look at the Small Business Administration’s website at http://www.SBA.gov for more helpful information.

Business Capital Solutions In Canada: Accessing Proper Cash Flow & Commercial Financing

Business capital requirements in Canada often boil down to some basic truths the business owner/financial mgr/entrepreneur needs to address when it comes to financing for businesses.

One of those truths? Knowing the true state of their financial condition and what financing they do and don’t qualify for when it comes to meeting commercial lending requirements in Canadian business.

Business Loans In Canada

Whether you are smaller or start-up firm looking for information on how to get a business loan or a larger established firm looking for growth financing or acquisition opportunities we’re highlighting 3 mistakes that commercial loan seekers like your company need to avoid making when addressing, sourcing and negotiating your cash flow / working capital and commercial financing needs.

1. Understand the true condition of your company finances – These are almost always successful addressed when you spend time on your financials and understand how your financial statements reflect your access to commercial loans & business credit in general

2. Ensure you have a plan in place for sales growth and financial needs as it relates to commercial financing

3. Understand that actual hard facts about cash flow which is, of course, the lifeblood of your company

Can you honestly answer or feel positive about all those 3 points. If so, pass Go and collect $ 100.00!

A good way to address your company’s finance plans is to ensure you understand growth finance solutions, as well as how to manage in a downturn – i.e. not growing, losing money, etc; It’s never fun to fund yourself in an economic or industry downturn such as the COVID pandemic of 2020!

When we talk to clients of new or established businesses it seems they are almost always talking about sales, so the ability to understand and focus on the differences in their profits and cash fluctuations is key.

How do cash flow and sales plans and projections affect the type of financing you require? For one thing sales growth usually starts out by consuming your cash, not generating it. A poor finance plan will drag your business down and addressing financing simply gets tougher and tougher.

Three basics always emerge when it comes to your search for the right business capital and financing.

1. The amount of financing you need

2. The type of financing (debt/cash flow/asset monetization) The business loan interest rate will be dramatically affected by whether you choose traditional or alternative financing solutions. Private business loans in Canada come from non regulated commercial finance companies most often known as ‘ alternative lenders ‘. These lenders are typically highly specialized in one ‘ niche ‘ of business financing and may be Canadian firms or branches of U.S. banks and non-bank lenders

3. How the financing is structured to be manageable with your day to day operations

What Finance Company In Canada Can Meet Your Borrowing Needs & Why Is Capital Important In Business

Let’s identify and break down key financings your firm should know about and understand if they are applicable and achievable to your business. They include:

A/R Financing / Factoring / Confidential Receivable Finance

Inventory finance / floor planning / retail inventory

Working Capital term loans

Unsecured cash flow loans

Merchant working capital loans/advances – these loans are geared toward short term cash needs and are typically one year in duration. Loan amounts are typically 15-20% of your annual sales revenues.

Royalty finance

Asset based non bank business lines of credit

Tax credit financing (SR&ED bridge loans)

Equipment Leasing / Sale leasebacks – Equipment financing in Canada is used by almost 80% of all companies looking to acquire new, and used, assets.

Govt Guaranteed Small Business Loan program – Government Loans in Canada are sometimes referred to as ‘ SBL’, aka Note: BDC Finance solutions are available from this Canadian non-bricks and morter crown corporation. A small business loan via the government-guaranteed loan program comes with true flexibility around term loan duration, market rates, no pre payment penalties, and of course the low personal guarantee that is required by borrowers. These two ‘ government ‘ loan solutions are often perfect for financing a new business.

If you’re focused on not making mistakes in your business finance needs and want to capitalize on the solutions your competitors are probably already using seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your cash flow and commercial financing needs.

Stan has had a successful career with some of the world’s largest and most successful corporations.

His employers over the last 25 years were, ASHLAND OIL, ( 1977-1980) DIGITAL EQUIPMENT CORPORATION, ( 1980-1990) ) CABLE & WIRELESS PLC,( 1991 -1993) ) AND HEWLETT PACKARD ( 1994-2004 ) In 2004 Stan founded 7 PARK AVENUE FINANCIAL – He is an expert in Canadian Business Financing.