In this fast moving, competitive world, business owners are constantly seeking out new ways to grow their business. Today, technology has provided us with endless possibilities. Just as technology advances, so do business rules. In other words, the old business method is no longer the most practical.
There are two basic types of business finance, equity finance and debt finance. Broadly speaking, equity finance funds raised by a private investor, usually via an offering, and repaid using equity and/or stocks in a small business. The proceeds are then used for working capital purposes, to buy raw materials, and to make other Capital investments. Debt finance is basically paying the owner a monthly payment that is equal to a percentage of the total assets of the business. (This is where borrowing for a business loan comes into play.) Equity can also be obtained by selling part ownership in the business to a third party.
Typically, small businesses seek finance to expand their scope of operation or increase their production capacity. Most equity finance companies offer lines of credit with varying terms and conditions. Two main types are: Owner financing and Angel Investors finance. These two financing sources can be very confusing, but I will try to make things as simple as possible.
Owner financing means you personally own the business and therefore have “ownership” in the company. This means you own everything that goes into making your product, including your inventory, your machinery, your sales staff and your raw materials. The good news is, this type of financing rarely needs a credit check, down payment or collateral. The bad news is, because you own your business, it may be difficult to sell the company, if it turns out to be a bad deal. The advantage to this type of receivables finance is that you typically pay interest only payments until the receivables are fully paid off.
Angel Investors is investors that pool their money with a number of other investors to raise funds for business loans or line of credit. Angel investors normally receive either a loan or line of credit from the business loans provider. The good news about angel investors is that they typically pay a lower rate of interest than the creditors, which makes the repayments on the receivables finance easier to manage. They can also be more flexible with terms, which is important to companies looking for receivables finance.
Whether you go with traditional financing or an alternative source, it’s critical to have a financial manager involved in the process of handling the receivables finance. A financial manager should be responsible for collecting payments on a timely basis and managing the overall cash flow of your business. The primary goal of the financial manager is to ensure that your business makes a profit, and will not lose any money. To achieve this end, your financial manager will work with you to identify how much money you have coming in, how much money you have already spent, as well as your future projected budget.
Once you have identified all of these financial goals and you have a budget, it’s time to identify your lenders. Most companies go with a traditional bank or credit union for their business financing needs. This is still a viable option and can provide you with favorable rates. When working with a traditional lender, it’s important to remember to include all finance charges in the total cost of your loan. If the company will be requiring you to prepayment before receiving cash, it may significantly increase the cost of your loan. On the other hand, if you plan to repay the credit card in full, the interest rate will be much lower since the credit card company is already making a profit.
For companies that need more cash flow options, it’s often a good idea to work with an investor or private funding source. Investors generally offer much better financing terms than banks and credit unions and they don’t have the same overhead as a bank. However, investors usually take much longer to return their investment than a bank. If you’re unable to obtain a traditional long-term capital financing solution, consider working with a small private equity group that provides capital financing on a case-by-case basis. This can help solve your cash flow problems much faster.