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?

Guide to Right Investments

As an individual we all have targets and set goals in our finances, hence adequate information to the right investment is very important. Considering the fact that good investments help us to actualize our objectives in our education, career, capital projects, family needs, etc, then it’s imperative for us to understand these investments.Presently, we are faced with the recovery of the economy after experiencing the global economic meltdown for more than two years of economic impasse. In most African countries, especially Nigeria do not seem to get on a good start as the government has limited funds to inject into the economy (Capital market) unlike other developed nations of the world are currently doing. Therefore, there’s a need for us to make the right decision at this trying period. There are different types of Investments available to us; Savings, Insurance, Bonds, Equities and Stocks, FOREX, Real Estates, Importation and Exportation, and what have you. These may sound interesting, but we must look before we make decisions in our chosen investments.For most people, making the right investment decision can be a tough one. They assume that you need enough money to venture into a lucrative business. It is always a good idea to do some research before you can make a decision as to what you want to invest in. This is better achieved the most when you gather information on your type of investment because you want to make the right investments that would work best for you. It is financially wise for you to know the investment basics so that you will be in a position to have variety of choices. Is this where the use of funds comes in? It is advisable that you use your savings especially if you plan to invest in long term. Moreover, you do not need a lot to get into investing though; you can use your monthly savings and investing consistently. The Stocks and shares option is one of the most popular and profitable business.Also investing in Insurance policy is another guaranteed way of investing without having fear for drop in market price. Unlike the stock market, Insurance is a sure way of getting your money back with a certain accumulated interest over a stipulated period of time that is if there have not been any occurrences before the maturity date. This however, would be discussed exclusively in my subsequent articles.The mutual fund investment option is yet another form of investing whereby organizations collect money from different individuals and use it to venture into suitable quoted company stock at the right time.This reduces your risk of losing money since you are not directly investing in the stock market. You should look out for all loop holes and engage the services of a financial expert to help you make suitable investment choices.Before we delve into the various investments stated above properly, there is a need to highlight the basic Principles of Investments that would be our guide to a successful venture. I shall discuss 5 of these proven principles that would guide us through;The first investment principle we must know is to get the foundation right of any investments plan and all the hiccups we envisaged or encountered would be checked. The problem most people have is that they try to solve their challenges from the surface. It is easy for one to quickly take a pain relieving tablets to stop his toothache problems without knowing the cause. Alright let’s look at our business transactions as an instance. A growing businessman borrows money from his fellow business men to build his business venture. By doing this overtime he became heavily indebted. But in order to be free from his indebtedness, he quickly pays his debts without ever considering the fact that his greatest weakness could be poor financial (money) management. In Nigeria today, an average 60 percent of the population are into entrepreneurship in one business or the other yet most of them have little idea of their venture which accounts for low returns in profit every quarter. This dismay performance could only be attributed to their poor knowledge of the said business, hence the business foundation is lacking. In addressing such situations, understanding the roots of these investments
would place us on the driver’s sit to know where and how to make great returns on our investmentsThe second principle simply tells us to set values in our investments’ plan and life goals generally as a yard stick to take us to our desired expectations. Values are internal anchors we set ahead of time to guide us in time of decisions making. It is also important to note that in our individual offices and business places, values we set for ourselves would determine the future and success of our careers and business ventures. According to Hamel, G. in “Rethinking the basis for Competition” in (Gibson, R (ed) Re-thinking The Future, Nicholas Brealey Publishing, London pp. 76-92 he says that “the big challenge in creating the future is not predicting the future. Instead, the goal is to try to imagine a future that is plausible – a future that you create based on values.” As matter of fact, we must place great values on our investments and businesses for it to grow beyond limits.On the third principles of investments, we must draw out our investments plans and strategy. One does not expect a high dividend as a return on your investments from a quoted company if you don’t invest well on that company. In any investment we do, there is need to know the strategy to adopt in getting good returns. Let’s look at the stock market for instance, you would not be foolish to invest in First Bank PLC in the Nigerian Stock Exchange that has reached its’ bullish state when you know most investors are bailing out after a period of planting then smiling to the banks for a good investment. You have to understand the investment first (foundation) then adopt a particular plan or strategy that would suit it for a stipulated period. That is why; Sun Tzu, great author, posits that “the General who wins the battle makes many calculations in his temple before the battle is fought while the General who losses make but few calculations beforehand”. You should know that whatever plans or strategy you make does not really guarantee you success as it may not suit the kind of investments you are into but get the right information to guide you through. Hence, you are advised to invest in financial books, business tips or any investment instruments to put you ahead of your contemporaries. By doing this, you must have drawn an investment philosophy that includes your; aim, period, returns and interest of your investments.The fourth Principles would centre on our spiritual strength in business. Knowing that sometimes we face all sorts of problems and setbacks in our investments or business activities, we may not have the physical power to overcome them. To be realistic, we need to look up to God by committing our businesses in His hands irrespective of our religion or faith. According to the Book of Proverbs; “If God can see everything in the world of the dead, he can also see in our hearts.” If we commit our ways to God, He would direct our paths. We should always seek Him when faced with any problems. I also suggest you renew your minds with great spiritual and inspirational materials. Great authors like; T.D. Jakes, John Mason, Joyce Meryce, Mathew Ashimolowo, Dale Carnegie, etc have wonderful works that can nourish our soul and make us achievers even in the face of adversity. You would find out that what you consider as problems are not problems, but some stumbling blocks you encountered as challenges to your road to success.The last Principles of investments which is the fifth, has to do with you as an individual. As a child while growing up, we all aspired to be one great professional in our chosen field. That’s the reason why Education could be adjudged as the highest form of investment. I must say that that most professionals or CEOs these days don’t utilize five percent of their brain. With the latest technologies at our finger tips, we seldom use our brain to work even getting the least calculations. Knowledge they say is power. The more knowledge we acquire, the more resourceful we become in affecting our lives positively. We have to invest in ourselves to improve on our business ideas and skills as change is inevitable. To buttress this point, let’s look at Romans 12:2; “and be not conformed to this world, but be ye transformed by the renewing of your mind that you may prove what is good and acceptable and perfect will of God”. Please make it a habit to invest huge part of your income on your brain and mind, as it’s such an investment that you would receive a 100% returns.Remember, knowledge is part of the key to all successful businesses. Follow these basic principles of investments guide and you would be amazed how your business would grow in greater profits.

10 Ways To Boost Your Credit Score

1. Deleting Errors in 48 HoursThis is the absolute fastest way to correct errors on your credit
report and raise your credit score. However, it can only be done
through a mortgage company or a bank. If you apply for a home
loan and find errors on your credit report, request the loan
officer to conduct a Rapid Rescore. But don’t mistake it for the
credit clinic tactic of multiple dispute letters.The Rapid Rescore strategy requires proper paperwork. You need
proof that the item is incorrect. It must come from the creditor
directly. For example, a letter stating the account is not your
account, a letter stating the account was paid satisfactorily,
a release of lien, a satisfaction of judgment, a bankruptcy
discharge, a letter for deletion of collection account or any
relevant evidence.This is the same documentation a bank or mortgage company would
require for the credit accounts anyways. The difference is, now
you can improve your credit score and receive a lower interest
rate. The results are not guaranteed and will run you about $50
per account.2. Deleting Negative CreditThis is the infamous area where you’ve heard of all the scams.
Credit repair clinics charge “an arm and a leg” and promise a
clean credit report. Sometimes even a new credit profile! People
spending hundreds, or even thousands, of dollars for something
they can do themselves.Removing errors is simple. Deleting negative credit that is
accurate requires advanced methods. But that is not the scope
of this report. So I’ll focus on the deleting the negative
errors.Credit report errors easily disappear by using a simple dispute
letter. If you have the paperwork proving the error as mentioned
above in Rapid Rescore, send copies of that along with the
dispute letter. This will make the credit bureau’s job easier and
you will get faster results.If you don’t have the documentation to prove the error(s), send
the dispute letter anyway. According to federal law, the credit
bureau’s have a “reasonable time” to validate your claim. They
will contact the creditor for verification of your dispute. Then
the account will be reported accurately – or deleted. It has been
generally accepted the “reasonable time” to complete this task is
30 days.If you’re not the do-it-yourself kind of person. Or don’t have
the time. You could hire someone who is very economical.3. PiggyBack Someone’s CreditThis is a fast and great little credit score booster. But it
requires a very trusting relationship. Simply put, someone else
adds you to their credit account. For example, when applying for
a credit card, you may have seen the section to add a card holder.
If your trusting person adds you, their payment history is now
reported on your credit report too. If they have perfect credit,
now you have a perfect account.To make this more effective, use an aged account. Imagine if your
trusted person has a 10 year old credit card account with a
perfect payment history and a balance of only 50% of the credit
limit. Wouldn’t you love to have this on your credit report? The
easy part is your trusted person just calls the credit card
company and requests a form to add a cardholder. Once completed
and activated, their entire account history and future is now
firmly planted on your account. Imagine if you secured 3-5 of
these accounts – especially installment accounts. Your credit
score could sky-rocket!The challenging part? Finding the trusted person. Since you already
have a low credit score and bad credit, how eager will someone be
to make you a cardholder? Even your parents don’t want you to
damage their credit. But, no one says you need to possess the card!
In other words, your trusted person could add you as a card holder
and never give you the card or PIN or any information. Since the
bills and all account information is still mailed to the trusted
person’s address, you won’t know anything about the account. This
scenario could land you many trusted persons. And you still benefit
with a higher credit score.4. Playing Round RobinThis strategy is one of the oldest credit building techniques
around. It used to be accomplished with secured savings accounts.
But now, it’s much easier with secured credit cards. In fact,
I’ve used this method myself.Here’s how it works: Take ,000 (or what you can afford) and get
a secured credit card. Once received, get a cash advance of 70%
of your credit limit. Get a second secured credit card. Once
received, get a cash advance of 70% of your credit limit. Get a
third secured credit card. Once received, get a cash advance of
70% of your credit limit.Open a new checking account with the final cash advance. Use this
account only for making payments on your three new credit cards.
If you make your payments on time every month, your credit score
will increase because you now have three new perfect payment
credit cards. (Initially, your credit score might drop a few
points due to the rapid, multiple accounts being opened. However,
be patient because within 4 months of no new accounts or any
delinquencies of any account, you will see your credit score
increase. Mine increased 60 points in 60 days!!)5. Pay on TimeThis one is quite obvious. But after 12.5 years in the mortgage
business, I discovered it still needs repeating. Your creditors
were gracious enough to loan you money. Now pay your damn bills!
If you don’t, your credit score decreases. EVEN IF ONLY 30 DAYS
LATE!That’s right folks. For some reason people think, “I’m only a
few weeks late. What’s the big deal?” Well, for the loan company,
if you pay late but consistent, they make a lot more money with
late fees and more interest (if a simple interest loan). For you,
your credit score is damaged. If you think long-term and credit
score, I’m certain you would not have a cavalier attitude.6. Pay Down DebtsThis seems like an obvious method, doesn’t it? But it is not as
transparent as you might think. Remember, we’re playing with
high-level statistics and probabilities which evaluates and
forecasts trends in your behavior. Here’s what you do…Never pay off your revolving debt in it’s entirety! Isn’t that a
surprise? Think about it. Your credit score is a reflection of
your ability to manage your credit. Paying off your debt is not
managing your debt. If you have a zero balance, how can you manage
it? You don’t. It no longer exists. And you cannot manage what
does not exist, right? Therefore, in terms of credit score, you
have demonstrated your ability to swiftly pay off accounts to
avoid managing them. Thus, slightly decreasing your credit score.One exception, of course, is if you’re over extended to begin
with. Pay off what’s necessary to make your credit profile look
great. Then manage the remaining credit.7. Don’t Close AccountsEven if you pay off revolving debts, do not close the account.
The longer an account is open with no negative reports, the
better it reflects in your overall credit score. This is due to
the weighted-average in the credit score formula. Many credit
experts suggest a balance of 30% of your credit limit. That’s
ideal. But you can go as high as 70% and still maintain a
healthy credit score.8. No New CreditYou must be vigilant in your credit behavior if you want the best
credit score. Therefore, do not get any new credit unless it is
absolutely necessary. Each time you apply for credit, an inquiry
is added to your report. This usually drops your credit score
slightly. When you have fresh credit, there is no track record
how you will manage (or pay) this account. Therefore, it’s a
higher risk which results in a minor drop in your credit score.
Remember, your credit score is about risk assessment.Here’s what you do: obtain credit for your housing, transportation,
college or continued education and 3-5 credit cards. That’s really
all you need for personal credit. If you want more credit, request
a credit limit increase on your current cards rather than apply
for new ones.9. Maintain A Mix of Credit TypesIf you show you can handle different types of credit at the same
time, you are rewarded with a great credit score. In other words,
get installment loans like vehicle, personal loan or mortgage.
Get revolving credit like credit cards: Visa, Mastercard, Sears,
Sunoco Gas, Costco. By mixing it up, you demonstrate you can
manage your credit because you will have short term and long term
credit with a fixed payment. As well as a “variable” monthly
payment on your credit cards.Keep these accounts open with a balance of 70% or less and paid
on time and you will witness your credit score climb to great
heights.10. Don’t File Bankruptcy or ForeclosureHere’s the most obvious advice: Don’t file for bankruptcy or
foreclosure. These stay on your credit report for 10 years and
always decrease your credit score. The older the bankruptcy or
foreclosure account becomes, coupled with re-built credit
history, the less of an impact they play on your credit score.Contrary to popular beliefs, you can legally delete a bankruptcy
and foreclosure. It’s not easy. But it’s possible. See the
advanced methods for that solution.To quickly rebuild your credit history after a bankruptcy or
foreclosure, use the Round Robin strategy above and get secured
credit cards. Now you can even get a car loan or mortgage right
after bankruptcy.© 2004 David Czach.——– Editor’s Note ———-Dave Czach has 12 years experience in the mortgage business and
a Bachelor’s Degree in Real Estate. He can be reached at
http://myLoanHero.com/go.cgi/daveczach.This article may be reprinted without compensation provided
there are no changes whatsoever to the article, the copyright
notice and the complete Editor’s Note. Any reprinting or
duplication without these conditions is copyright infringement.——– Editor’s Note ———-