There are several potential financing options available for cash-strapped businesses that need a good deal of working capital. A bank loan or line of credit is often the first option homeowners 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-ups and those that have experienced some form of financial hardship. Sometimes business owners who don’t qualify for a bank loan decide that seeking venture capital or attracting 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, homeowners sometimes don’t think about these downsides 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 actually two different types of financing.

Working capital, or money that is used to pay for business expenses incurred during the span of time until cash from sales (or accounts receivable) is collected, is short-term in nature, so must be financed through a short-term financing tool. However, equity should generally be used to fund rapid growth, business expansion, acquisitions, or the purchase of long-term assets, which are defined as assets that are repaid over more than a 12-month business cycle.

But the biggest downside to attracting equity investors to your business is a possible loss of control. When you sell shares (or stocks) in your business to venture capitalists or angels, you are giving up a percentage of ownership of your business, and you may be doing so at an inopportune time. With this dilution of ownership, most of the time you lose control over some or all of the most important business decisions that need to be made.

Owners are sometimes lured into selling stocks by the fact that there are few (if any) out-of-pocket expenses. Unlike debt financing, you generally do not pay interest with equity financing. The equity investor obtains his return through participation in the property acquired in his business. But the long-term “cost” of selling stocks is always much higher than the cost of short-term debt, both in terms of actual cash cost and soft costs such as loss of control and management of your company and the potential future value of the property shares being sold.

Alternative financing solutions

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

1. Full service factoring – Companies sell outstanding accounts receivable on an ongoing basis to a trade finance (or factoring) company at a discount. The factoring company then manages the account receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative financing that is especially suitable for fast-growing companies and those with client concentrations.

2. Financing of accounts receivable (A / R) – Accounts receivable financing is an ideal solution for companies that are not yet bankable but have a stable financial situation and a more diverse customer base. Here, the company provides details on all accounts receivable and promises those assets as collateral. The proceeds from those accounts receivable are sent to a safe deposit box while the finance company calculates a debt base to determine how much the company can borrow. When the borrower needs money, they apply in advance and the finance company advances money using a percentage of the accounts receivable.

3. Asset Based Loans (ABL) – It is a line of credit secured by all the assets of a company, which can include accounts receivable, equipment and inventory. Unlike factoring, the company continues to manage and collect its own accounts receivable and continually submits collateral reports to the finance company, which will periodically review and audit the reports.

In addition to providing working capital and allowing owners to maintain business control, alternative financing can also provide other benefits:

• It’s easy to determine the exact cost of financing and get a raise.
• Professional collateral management can be included depending on the type of facility and the lender.
• Interactive reports are often available online in real time.
• It can provide the business with access to more capital.
• It is flexible: it finances the ebbs and flows with the needs of the company.

It is important to note that there are some circumstances where 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 generally not well suited to debt financing. However, equity capital is often not the appropriate financing solution to solve a working capital problem or help close a cash flow gap.

A precious commodity

Remember that business equity is a precious asset that should only be considered in the right circumstances and at the right time. When seeking equity financing, this should ideally be done at a time when the company has good growth prospects and a significant need for cash for this growth. Ideally, majority ownership (and therefore absolute control) should remain in the hands of the founders of the company.

Alternative financing solutions such as factoring, A / R financing, and ABL can provide the working capital to power many cash-strapped businesses that do not qualify for the need for bank financing, without diluting ownership and possibly ceding the money. business control at an inopportune time for the owner. If these businesses go bank later, it is often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a trade 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 ensure that you choose the best option for your business. Using alternative financing can help your business grow without diluting your ownership. After all, it’s your business, shouldn’t you keep as much as possible?