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?

How Technology Advancements Has Its Impact on Us

The advancement of new technology has been taking place since the beginning of human history. From the invention of items like the spear and knives made out of rocks and sticks to aid in the capturing and killing of animals for food, to items like the first printing press and the computer. The question: are the impacts positive or negative?Technology is a word used to collectively describe or portray the advancements, abilities,creations, undertakings, views, and knowledge of a singular group of persons: we as human-kind. The advancement in technology has been exceptionally fast in the 20th and 21st century. With electronic technology and machines being produced and improved all the time, it was very likely that along with the positive aspects of these new advancements, people would also consider the negative aspects and look to criticize new technology.A Positive SideAs the old age states “NECESSITY IS THE MOTHER OF INVENTION” i.e. necessities tend to spawn inventions and each invention is annexed with the need of betterment and transmogrification. Newer and newer advances are happening by the day. Technological change is in large part responsible for many of the secular trends in such basic parameters of the human condition as the size of the world population, life expectancy, education levels, material standards of living,and the nature of work, communication, health care, war, and the effects of human activities on the natural environment.Other aspects of society and our individual lives are also influenced by technology in many direct and indirect ways, including governance,entertainment, human relationships, and our views on morality, mind, matter, and our own human nature. Needless to add that these advancements also invigorate economic development as the effective use of technology reduces the material production cost and the overhead charges which generate savings in the economy and thus lead to national development.And the Negative SideProblems and potentials often go hand in hand; Society has become more and more dependent on technology. So much so that we sometimes lack the willingness to think before we act. We become impatient if it takes more than a few seconds to download a copy of the morning news paper. We expect immediate responses to our email, and we expect someone to answer their cell phone whenever and wherever we call.Technology is making us so bust that we can can’t even find time to spend with our closed one’s. it would be surprising to know that people are in contact through chat and online messaging though they are in same city because they think its more faster and effective but they are forgetting that meeting personally can never replace online chatting.”technology in sum, is both friend and enemy”Neil Postman, author of the book called Technopoly, writes that ‘technology in sum, is both friend and enemy’. He can see the benefits and how technology can be seen as a friend to humanity that ‘it makes life easier, cleaner and longer’. He can accept it does humanity good. It’s almost a positive claim based on technology like medical advancements such as x-ray devices and medical drugs that help to lengthen life and help humanity. This is a very positive aspect of the advancement because we can improve health and lengthen our lives. But these medical advancements are mainly produced by companies, who then choose to monetize the advancement. Moral responsibility is weakened by this greed for money; they have lost the objective in saving lives or making people healthy again. They are only creating advancements in technology in order to make a lot of money.Neil Postman also sees technology as undermining human processes as well. That technology creates ‘a culture without moral foundation’ and undermines social relations between humans. This can currently be seen with the argument over social networking sites on the internet. It was created for people to communicate and network, yet some people use it as their only form of communication with other people. This doesn’t necessarily help their social skills in the real and outside world away from the internet. People can become addicted and reliant on this technology and use it as their main form for creating social relations. It makes things like understanding facial expressions and body language hard to grasp.ConclusionIf technological advancements are put in the best uses, it further inspires the development in related and non-related areas but at the same time its negative use can create havoc in the humanity or the world. Technology has, and will, change the moral fabric of humanity; it is up to the present generation to heed this warning and not allow such societal travesties of immense proportions ever to occur again Technological Advancements will continue to advance rapidly as we move into the next millennium. What is important is to ensure that these advances benefit humanity as a whole…

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