Alternative financing Vs. Venture Capital

Alternative financing Vs. Venture Capital

There are several potential funding options available for cashlinked companies that need healthy working capital. A bank loan or credit loan is often the first option that the owners think about and for companies that qualify this may be the best option.

In today's insecure business economic and regulatory environment it can be difficult to qualify for a bank loan especially for startups and those who have had some kind of financial difficulties. Sometimes owners of companies that do not qualify for a bank loan decide that there are other profitable options for seeking venture capital or investing in equity investments.

But are they really? Although there are some potential benefits to getting venture capital and socalled angel investors for your business there are also disadvantages. Unfortunately the owners sometimes do not eat these disadvantages until the ink has dried on a contract with a risk capitalist or an angel winger and it's too late to go back from the deal.

Different types of funding

One problem with entering equity investors to help raise working capital is that working capital and equity are really two types of financing.

Working capital or the money used to pay business costs incurred during the time delay until money from sales or accounts receivable is collected is shortterm so it should be financed through a shortterm financing tool. However equity should generally be used to finance rapid growth expansion of companies acquisition or purchase of longterm assets which are defined as assets that can be repaid over more than a 12month business cycle.

But the biggest disadvantage of getting the shareholders in your company is a potential loss of control. When you sell shares or shares in your business to venture capitalists or angels you are part of the ownership of your business and you can do it in a discreet time. With this dilution of ownership there is usually control over some or all of the most important business decisions that must be made.

Sometimes owners are tempted to sell capital by the fact that there is little if any outofpocket cost. Unlike debt financing you usually do not pay interest on equity financing. Shareholders get their return through ownership in your company. However the longterm cost of selling equity is always much higher than the shortterm debt costs both in terms of actual cash costs and soft costs such as loss of control and management of your company and future future. The value of the units sold.

Alternative financing solutions

But what if your business needs working capital and you do not qualify for a bank loan or credit card? Alternative financing solutions are often suitable for injecting working capital into companies in this situation. Three of the most common types of alternative funding used by such companies are:

  1. Full Service Factoring Company sells current accounts receivable to a company with commercial financing or factoring at a discount. The factoring company then handles the claim until it is paid. Factoring is a wellestablished and accepted method of temporary alternative financing that is particularly well suited for fastgrowing companies and customers with customer concentrations.
  1. Trade receivables A R Financing A R financing is an ideal solution for companies that are not yet bankable but which have a stable financial condition and a more varied customer base. Here the business provides information on all accounts receivable and provides these assets with security. The proceeds from these claims are sent to a lockbox while the financial company calculates a loan base to determine the amount the company can borrow. When the borrower needs money it makes an advance application and the financial company advances money with a percentage of accounts receivable.
  1. AssetBased Loan ABL This is a credit facility secured by all company assets which may include A R inventory and inventory. Unlike factoring the business continues to manage and collect own receivables and issues ongoing safety reports to the financial company which will review and regularly review the reports.

In addition to providing working capital and allowing owners to maintain corporate control alternative funding can also provide other benefits:

It is easy to determine the exact cost of financing and get an increase.

Professional security checks can be included depending on the type of facility and lender.

Interactive reporting in real time is often available.

This can give the store access to more capital.

It is flexible financing ebbs and flowing with the company's needs.

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