Alternative Financing Vs. Venture Capital: Which Option Is Best for Boosting Working Capital?

August 17, 2016

There are several abeyant costs options accessible to cash-strapped businesses that charge a advantageous dosage of alive capital. A coffer accommodation or band of acclaim is about the aboriginal advantage that owners anticipate of – and for businesses that qualify, this may be the best option.

In today’s ambiguous business, bread-and-butter and authoritative environment, condoning for a coffer accommodation can be difficult – abnormally for start-up companies and those that accept accomplished any blazon of banking difficulty. Sometimes, owners of businesses that don’t authorize for a coffer accommodation adjudge that gluttonous adventure basic or bringing on disinterestedness investors are added applicable options.

But are they really? While there are some abeyant allowances to bringing adventure basic and alleged “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t anticipate about these drawbacks until the ink has broiled on a arrangement with a adventure backer or angel broker – and it’s too backward to aback out of the deal.

Different Types of Financing

One botheration with bringing in disinterestedness investors to advice accommodate a alive basic accession is that alive basic and disinterestedness are absolutely two altered types of financing.

Working basic – or the money that is acclimated to pay business costs incurred during the time lag until banknote from sales (or accounts receivable) is calm – is concise in nature, so it should be financed via a concise costs tool. Equity, however, should about be acclimated to accounts accelerated growth, business expansion, acquisitions or the acquirement of abiding assets, which are authentic as assets that are repaid over added than one 12-month business cycle.

But the better check to bringing disinterestedness investors into your business is a abeyant accident of control. If you advertise disinterestedness (or shares) in your business to adventure capitalists or angels, you are giving up a allotment of buying in your business, and you may be accomplishing so at an contrary time. With this concoction of buying a lot of about comes a accident of ascendancy over some or all of the a lot of important business decisions that accept to be made.

Sometimes, owners are absorbed to advertise disinterestedness by the actuality that there is little (if any) abroad expense. Unlike debt financing, you don’t usually pay absorption with disinterestedness financing. The disinterestedness broker assets its acknowledgment via the buying pale acquired in your business. But the abiding “cost” of affairs disinterestedness is consistently abundant college than the concise bulk of debt, in agreement of both complete banknote bulk as able-bodied as bendable costs like the accident of ascendancy and administration of your aggregation and the abeyant approaching bulk of the buying shares that are sold.

Alternative Costs Solutions

But what if your business needs alive basic and you don’t authorize for a coffer accommodation or band of credit? Another costs solutions are about adapted for injecting alive basic into businesses in this situation. Three of the a lot of accustomed types of another costs acclimated by such businesses are:

1. Full-Service Factoring - Businesses advertise outstanding accounts receivable on an advancing abject to a bartering accounts (or factoring) aggregation at a discount. The factoring aggregation again manages the receivable until it is paid. Factoring is a complete and accustomed adjustment of acting another accounts that is abnormally adapted for rapidly growing companies and those with chump concentrations.

2. Accounts Receivable (A/R) Costs - A/R costs is an ideal band-aid for companies that are not yet bankable but accept a abiding banking action and a added assorted chump base. Here, the business provides data on all accounts receivable and pledges those assets as collateral. The gain of those receivables are beatific to a lockbox while the accounts aggregation calculates a borrowing abject to actuate the bulk the aggregation can borrow. If the borrower needs money, it makes an beforehand appeal and the accounts aggregation advances money application a allotment of the accounts receivable.

3. Asset-Based Lending (ABL) - This is a acclaim ability anchored by all of a company’s assets, which may cover A/R, accessories and inventory. Unlike with factoring, the business continues to administer and aggregate its own receivables and submits accessory letters on an advancing abject to the accounts company, which will analysis and periodically analysis the reports.

In accession to accouterment alive basic and enabling owners to advance business control, another costs may accommodate added allowances as well:

  • It’s simple to actuate the exact bulk of costs and admission an increase.
  • Professional accessory administration can be included depending on the ability blazon and the lender.
  • Real-time, online alternate advertisement is about available.
  • It may accommodate the business with admission to added capital.
  • It’s adjustable – costs ebbs and flows with the business’ needs.

It’s important to agenda that there are some affairs in which disinterestedness is a applicable and adorable costs solution. This is abnormally accurate in cases of business amplification and accretion and new artefact launches – these are basic needs that are not about able-bodied ill-fitted to debt financing. However, disinterestedness is not usually the adapted costs band-aid to break a alive basic botheration or advice bung a cash-flow gap.

A Adored Commodity

Remember that business disinterestedness is a adored article that should alone be advised beneath the appropriate affairs and at the appropriate time. If disinterestedness costs is sought, alluringly this should be done at a time if the aggregation has acceptable beforehand affairs and a cogent banknote charge for this growth. Ideally, majority buying (and thus, complete control) should abide with the aggregation founder(s).

Alternative costs solutions like factoring, A/R costs and ABL can accommodate the alive basic accession abounding cash-strapped businesses that don’t authorize for coffer costs charge – after diluting buying and possibly giving up business ascendancy at an contrary time for the owner. If and if these companies become bankable later, it’s about an simple alteration to a acceptable coffer band of credit. Your broker may be able to accredit you to a bartering accounts aggregation that can action the appropriate blazon of another costs band-aid for your accurate situation.

Taking the time to accept all the altered costs options accessible to your business, and the pros and cons of each, is the best way to accomplish abiding you accept the best advantage for your business. The use of another costs can advice your aggregation abound after diluting your ownership. After all, it’s your business – shouldn’t you accumulate as abundant of it as possible?