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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?

How to Design a Long Narrow Garden

The main problem with long narrow gardens is that they can feel like you’re standing in a corridor. In a long, narrow garden your eye is drawn straight to the boundaries making the space seem small and claustrophobic. This type of garden does not invite exploration and the furthest parts of the garden often remain dark, dank and unused. Counteracting the claustrophobic feeling and giving the impression of greater space and depth are the main challenges when designing a long, narrow garden.There are three main ways to deal with the problems of a long-narrow space. One strategy involves changing the perceived shape of the garden and tricking the eye into focusing away from the garden boundaries. Another method is to introduce drama by creating a more complex journey around the garden. The third way is to draw the eye upwards by introducing vertical elements that open up the garden by giving the appearance of more height.Although it seems counter-intuitive to close off a garden that is already feeling cramped, dividing the garden into separate areas is a very effective way to design a long-narrow garden. Creating separate garden rooms each with its own distinct character makes people want to use the whole garden and explore the next room. The garden will become more useable because each room has its own purpose. Breaking up the space is a great way of stopping the eye from immediately alighting on the rear boundary. This strategy creates a more stimulating journey and encourages exploration of the garden.Walls work well for creating garden rooms, especially if they have a window offering a tantalizing glimpse through to the next room. However, brick and block walls are expensive to build and other methods of dividing the space can be just as effective. Clipped hedges, pergolas, or a simple screen of posts and trellis with an archway through all make good partitions and may be more appropriate for the style and setting of the garden. Railway sleepers set on end like a huge vertical blind create a dramatic garden screen.The transitions between the garden rooms provide another opportunity to add visual and vertical interest. Circular moon gates add striking architectural detail, they also give height and their shape is excellent for focusing attention inside the garden. An arched doorway cut through a clipped hedge creates a dark outline that cries out to be explored.Circles and curves are a great for directing attention where it is desired. Using circular shapes for lawns and seating areas focuses the eye into the centre of the garden. An ‘S’ shaped path will draw attention away from the boundaries and give a more interesting journey through the garden. Placing some taller plants or trees in the deep curves of the ‘S’ creates informal divisions and stops the eye.Another design strategy that tricks the eye and creates a more exciting, indirect route around the garden is to set the plan on the diagonal. The lines of paths, lawns and borders set at 45 degrees to the boundaries draws the eye across the garden and gives the impression of greater width. Using zig-zag paths will provide a meandering walk around the garden.There are many different ways to create height in a garden, it can be done simply by including trees and taller plants. Pergolas are useful for creating instant vertical focus, they can be used as room dividers and give extra space for planting which is especially useful in a small garden. Clipped, formal hedges are also excellent for creating height, as a backdrop for planting and as walls for outdoor rooms.Long narrow sites can make fabulous gardens, but like any tricky space they need a good design that addresses all the practical issues, and includes a bit of wizardry to make them comfortable and inviting spaces to spend time in.