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?

Business Loans In Canada: Financing Solutions Via Alternative Finance & Traditional Funding

Business loans and finance for a business just may have gotten good again? The pursuit of credit and funding of cash flow solutions for your business often seems like an eternal challenge, even in the best of times, let alone any industry or economic crisis. Let’s dig in.

Since the 2008 financial crisis there’s been a lot of change in finance options from lenders for corporate loans. Canadian business owners and financial managers have excess from everything from peer-to-peer company loans, varied alternative finance solutions, as well of course as the traditional financing offered by Canadian chartered banks.

Those online business loans referenced above are popular and arose out of the merchant cash advance programs in the United States. Loans are based on a percentage of your annual sales, typically in the 15-20% range. The loans are certainly expensive but are viewed as easy to obtain by many small businesses, including retailers who sell on a cash or credit card basis.

Depending on your firm’s circumstances and your ability to truly understand the different choices available to firms searching for SME COMMERCIAL FINANCE options. Those small to medium sized companies ( the definition of ‘ small business ‘ certainly varies as to what is small – often defined as businesses with less than 500 employees! )

How then do we create our road map for external financing techniques and solutions? A simpler way to look at it is to categorize these different financing options under:

Debt / Loans

Asset Based Financing

Alternative Hybrid type solutions

Many top experts maintain that the alternative financing solutions currently available to your firm, in fact are on par with Canadian chartered bank financing when it comes to a full spectrum of funding. The alternative lender is typically a private commercial finance company with a niche in one of the various asset finance areas

If there is one significant trend that’s ‘ sticking ‘it’s Asset Based Finance. The ability of firms to obtain funding via assets such as accounts receivable, inventory and fixed assets with no major emphasis on balance sheet structure and profits and cash flow ( those three elements drive bank financing approval in no small measure ) is the key to success in ABL ( Asset Based Lending ).

Factoring, aka ‘ Receivable Finance ‘ is the other huge driver in trade finance in Canada. In some cases, it’s the only way for firms to be able to sell and finance clients in other geographies/countries.

The rise of ‘ online finance ‘ also can’t be diminished. Whether it’s accessing ‘ crowdfunding’ or sourcing working capital term loans, the technological pace continues at what seems a feverish pace. One only has to read a business daily such as the Globe & Mail or Financial Post to understand the challenge of small business accessing business capital.

Business owners/financial mgrs often find their company at a ‘ turning point ‘ in their history – that time when financing is needed or opportunities and risks can’t be taken. While putting or getting new equity in the business is often impossible, the reality is that the majority of businesses with SME commercial finance needs aren’t, shall we say, ‘ suited’ to this type of funding and capital raising. Business loan interest rates vary with non-traditional financing but offer more flexibility and ease of access to capital.

We’re also the first to remind clients that they should not forget govt solutions in business capital. Two of the best programs are the GovernmentSmall Business Loan Canada (maximum availability = $ 1,000,000.00) as well as the SR&ED program which allows business owners to recapture R&D capital costs. Sred credits can also be financed once they are filed.

Those latter two finance alternatives are often very well suited to business start up loans. We should not forget that asset finance, often called ‘ ABL ‘ by those Bay Street guys, can even be used as a loan to buy a business.

If you’re looking to get the right balance of liquidity and risk coupled with the flexibility to grow your business seek out and speak to a trusted, credible and experienced Canadian business financing advisor with a track record of business finance success who can assist you with your funding needs.

Accelerate Your Career By Acquiring An Online Education Degree

Do you long for a new or accelerated career, but don’t want to commit to a four year degree program? Surprise, you don’t need a bachelor’s degree! Today’s associate degree programs take only two years and you can acquire one through an online education college. Amazingly, there are 3.2 million higher education students in the United States who are taking courses online and you could be one. (Sloan Survey of Online Learning, Making the Grade: Online Education in the United States).There are many exciting and well-paid careers that require only an associate degree. Consider graphic design, radiologic technology, licensed practical nursing, paralegal, and dental hygiene. The Bureau of Labor Statistics (BLS) projects these jobs to be among the fastest growing in 2006. Here are some facts about well-paid careers that require only an associate degree.Graphic DesignMany people are unfamiliar with graphic design. The Bureau of Labor Statistics states that graphic designers have the most job opportunities in the field of design. There is a 9 to 17% projected increase in employment opportunities between 2007 and 2014.”Success in this industry is based purely on creativity and skill so if you have natural artistic ability, there’s a lot of potential,” says Jason Rich, career expert and author of 202 High-Paying Jobs You Can Land Without a College Degree (Entrepreneur Press 2006).A two year, associate program will help develop your artistic skills and either start a business or find a position in a corporation. A graphic designer earns $29,400 to $50,800 per year. If you love art, this is a great career for you.Radiologic TechnologyA radiologic technologist (RT) is part of a health care team, able to assist in the diagnosis of internal problems and illnesses. An radiologic technologist involves interactions with patients and, in some ways, is similar to being a nurse. The RT tales x-rays and injects non-radioactive materials into patients’ bloodstreams to help diagnose illnesses. This area of study can also lead to further study in CT scanning, MRI technology, and radiation therapy. The earnings of an RT are $36,200 to $52,400 yearly.Physical Therapist’s AssistantThe need for physical therapists’ assistants is expected to increase by 27% or more over the next eight years. This career can prepare you for moving into massage therapy or sports medicine also. The average yearly pay is $31,000 to $44,000. As the baby boomer population ages, there will be a huge need for physical therapists’ assistants. If fitness and sports are your loves, consider this career as a gateway into those arenas.Medical TranscriptionistA medical transcriptionist listens to and transcribes dictated recordings made by doctors and other health care workers. The information is turned into medical reports, letters, and other documents. The BLS expects this job to grow 18 to 26% in the next eight years. Hourly wages run from $11.50 to $16.30. The greatest fact about this career is that it can be done at home! If you have children to care for, this may be the career for you.Licensed Practical Nurse (LPN)Licensed practical nurses work in hospitals, home health care, nursing homes, doctor’s offices, and outpatient care centers. They do many of the jobs registered nurses do. This job is expected to grow at an average rate for LPNs working in hospitals, but for those working in other venues, the job growth rate will be around 27%. The salary rate is $34,000 to $40,600 per year and is expected to rise.Paralegals and Legal AssistantsJobs for paralegals and legal assistants are also expected to increase by 27% or more in the next eight years. They earn from $39,000 to $50,000 per year, which is extremely well-paid for someone with an associate degree. Top paying jobs will be found in the federal government and large law firms, but are available in most cities.When considering an online education, consider the opportunities the online associate degree can provide. Your career possibilities can include business, education, information technology, health, law, and many more. According to the National Science Foundation, more than a fifth of individuals employed in science and engineering fields hold less than a bachelor’s degree, with 17% holding an associate degree. If you’re not sure how much education you want to commit to, an online associate degree is a good, first step. Students often choose an online, associate degree in order to specialize in a field, or to acquire a well-paid career while considering further online education college degrees.(Statistics Source: The Occupational Outlook Handbook 2006-2007, United States Bureau of Labor Statistics)
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