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?

Home Schooling a Future Millionaire

The public school system in America is a dinosaur and the Ice Age is not far off. With all of the advances we’ve made in technology and as a society in the last 50 years, it’s ludicrous to see our children being educated in the standardized system used 50 years ago. The influx of parents who are home schooling and the home schooling resources available now versus 10 years ago attest to the fact that parents are fed up.Not only do the majority of public schools not work, but our children are getting less and less education. American children are getting further and further behind their Japanese and German counterparts; and in a time where the economy is global, how do our children remain competitive in the job market of tomorrow?Besides the threat of violence at school, the lack of education going on there, the generally sliding test scores and the lack of alternatives; the economical drain on property tax payers to support this lumbering, antiquated system is phenomenal. Simply put, if all of us had the option of doing something else, most of us would. Private schools, magnet schools or home schooling alternatives are a reality.For some of us though, there is currently no feasible alternative. Many of us simply cannot afford to shell out college-sized tuition starting in grade school. For many more who work outside the home, the time required to start home schooling is a commitment that we’re not sure we can incorporate into our already packed schedules.What is your child really learning at school currently that will translate into success and financial freedom and entrepreneurial skills later on in life? If we all sat down and looked through the graded papers our children bring home and asked, “How does this turn into dollars and cents later on?” the answer would be, “Most of it doesn’t.”So what can you do right now, on the budget and with the time you have to improve the quality of your child’s education?Expand where you’re at.What is your child learning about money right now? Normally we learn early in grade school how to recognize money (what’s a nickel, what’s a dollar), we see math used in story problems where the concept is actually addition or subtraction; and that’s our money education unless we receive additional education in college. For a subject that is so near and dear to our hearts, money is not prominent in most of our educations.This is where a lack of education spells a future lack of funds. You want your child to become a millionaire later in life; or even just be financially independent, you will be responsible for showing them how to think and what to do with money. Setting aside one hour a week to discuss finances with your child would give them so much more of a head start than they have right now. Make it interesting, make it personal, teach them what you wish someone would have taken the time to teach you. Are you paying bills this week? Have your child sit down and watch what you’re doing. Explain the method of accounting you use and what you’re paying for and how much. Are you setting up a budget for the family? Give your child the opportunity to give input on the budget as well as see how it works.If finances are a problem in your family, your child needs to understand money now more than ever. If you’re facing creditors, bankruptcy or foreclosure, why keep your child in the dark regarding the circumstances? If you’re investing for the future or for their college, why not explain what your goals are? Can you explain your own financial goals or why you’ve chosen a specific investment? Can you explain simple stock market terms, what is a certificate of deposit, what is a treasury bond? If not, maybe this is the first step in learning more about your finances – teaching your child. Don’t be embarrassed to start at the beginning; just start.What is your child learning about business right now? For most people’s children, their business education is confined to: trying to explain what their parents do for work, going to work with them one day a year and then getting their first job at 16. They will learn more about business if they go to college with a business major, but what practical, real-world experience are they receiving? Can you realistically expect someone with that limited amount of business knowledge to start and run their own business? How did you learn about business if you own your own?You had to jump in and do it.Whether you own your own business or not, all of us can agree that an education in business is a great way to cover core concepts and grasp a general idea of a topic, but experience in business is priceless. Your child starting a paper route or a babysitting business will teach them on a personal level what coming to work with you once a year would never do.Expand where you’re at. The entrepreneurial spirit that you are growing is an education that your child will never forget. Rather than sit back and watch our children waste precious learning time in front of the television, as a family commit to one hour a week getting an education on money. Go to the library, get on the Internet, find material that excites and inspires you and your child will become excited and inspired about money.Home schooling is a term that really means, “The buck stops here.” If we choose a better quality of education for our children, we have to supplement at home. If we choose a successful mindset for our children, we have to show by example. If we want more for our children regarding money and business potential for our children than we have had, we have to provide them with more right out of the gate.Right now there are more resources available for at-home education than ever before. We have more information at our fingertips than any generation before us. What is our excuse if we don’t use it?
Ultimately, what will give your child a leg up in a global economy and an ever-changing job market will be the confidence you instilled in them and an education than can be calculated into dollars and cents.

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.