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?

Digital Marketing – The Need For Digital Marketing – Avoiding Bad Companies

Digital marketing in contextThere are 1.5 billion internet users worldwide, and in the UK alone over 884 million minutes are spent online. Internet sales account for £36 billion per year – Brits spend £71 per month on average on online goods and services (reference: see below). It is obvious that a digital presence has now become mandatory as opposed to just desirable. But it can be said that to be absent from Google is to be absent from the internet. I would further this by suggesting that to be absent from the first page of Google is to be absent from the internet. Enter digital marketing.Competition on the internet is fierce. Inadequate digital marketing means low search ranking, poor brand exposure and ultimately loss of lucrative revenue streams.What should I look for in an online marketing company?If you have an interest in your company succeeding online, achieving a page-1 rank on Google is of the highest concern. There are no secrets – Many companies will try to convince you into thinking that search engine optimisation (SEO) is niche and dodgy and only they have the knowledge of ‘advanced’ link building strategies, etc, etc. These are tactics used to gain dishonest sales.An honest and professional digital marketing agency will provide accountability and transparency to its services. Vague weekly reports are not enough. Some sort of regular precise update with current progress, assuring clients that goals are being met, is obligatory. In addition, objectives are agreed during several initial meetings, ensuring both parties are happy and confident in the campaign’s direction.An online marketing agency is not the same as a web designer who provides generic SEO!What benefits are there in hiring a digital marketing agency?A good agency will maximise the impact of your online marketing to get the best return on your investment. After initial meetings, they should get on with their job and leave you to do what you do best – run your business! Most importantly, the solution should be tailored to your needs and objectives, amplifying the power of your marketing campaign just like the generic solutions won’t!
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Case Study: From Red to Black, Generate Double-Digit Sales Increases Through Strategic Marketing

Conventional wisdom states that when times are bad and sales are down, management should cut all expenses except sales and marketing. And when things get really bad, management must cut everything but sales because selling is the fastest way to increase revenues.This business-to-business case study illustrates how, if executed properly, strategic marketing can sometimes be a quicker, more efficient and more effective way to grow sales.The Situation A manufacturing firm’s brand enjoyed high name recognition, and the longstanding business had survived and often thrived through multiple business cycles during its storied history. A competent management team had been assembled and was balancing operational needs with cash-flow requirements.However, sales of the manufacturer’s primary division were declining and the market for its products was in a severe depression. The lack of volume meant the company was not covering its overhead. Escalating energy and raw material costs were eroding profit margins.Product and Distribution ChannelsMarket perceptions of its products were mixed. The company had a strong reputation as a manufacturer of “green” building products, but it was not well regarded for solving end-user problems. The firm was not in a position to compete on price.Although the company’s products were esteemed by specifiers and designers for being sustainable and other specific performance attributes, many end-users were put off by the high cost of the products, and sometimes found these products to be difficult to work with and of questionable quality.Low sales volume and slow inventory turns decreased the company’s value to channel members and kept new distributors from taking on the line. To cut costs, existing distributors reduced their inventories of the company’s products, and dropped slower-moving niche items manufactured by the firm entirely.In response, management hired a full-service marketing firm and undertook a full-blown marketing and advertising campaign. The marketing message trumpeted the environmental friendliness of the firm’s products but failed to communicate their other performance values.Choosing Strategic PrioritiesRather than simply initiating a typical marketing campaign, the company needed to find:· A high-volume application…· In which it could be cost-competitive…· In which it had a different story to tell…· In an expanding market, enabling growth without having to take market share…· And reestablish its value to distributors.Internal AssessmentThe company’s primary product is a fiber board used for various purposes by construction trades. Reducing sound transmission in buildings appeared to be the company’s best opportunity to generate volume. Multi-family projects that required sound reduction could require multiple truckloads of product. The firm already marketed this application but was not emphasizing it.The company’s sound-reduction product performed well and was cost-competitive in flooring applications. It was installed very differently than the products dominating the market. Competing products were sold directly to specialty contractors, bypassing traditional distributors and contractors.The housing market had collapsed with no recovery in sight. The lack of money for down payments, overly strict mortgage requirements, and fear of declining home values crippled demand.Still, people needed places to live. Apartment construction, while also down, remained viable, and increased demand was forecast for the foreseeable future. Demographic changes predicted surging demand for student housing and assisted living. Changing consumer tastes were boosting the desire for urban living. The Federal government’s spending on affordable housing, often in the form of apartments, was increasing in an effort spur economic growth.Executing the Strategy A volume application had been identified that met the company’s strategic imperatives. The marketing group now needed to focus all its resources on implementing the initiative as quickly and inexpensively as possible against larger, better-capitalized competitors that dominated the market. Every problem perceived by customers that could hold back sales needed to be solved.HowThe marketing team implemented a wide array of tactics to support the new strategy:Brought It Inside. To reduce cost, the firm terminated its engagement with the full-service outside marketing agency and brought marketing in-house, with assistance from independent professionals.Aligned the Messaging. The marketing team developed a compelling tag line aligned with the new strategy. The message was simple and specific, yet universal to the company’s other product lines.Developed Aligned Materials. The team conveyed its solution and addressed all known obstacles through new marketing tools in a wide variety of mediums, including video, website, packaging, sales aides, installation graphics, product sheets, trade show booths and more.Accessed All Available Channels. The team tapped all available cost-effective channels to disseminate the message, including the company website, YouTube and industry related third-party websites.Quality Improvements. The marketing team communicated quality improvements needed to increase market acceptance to operations. The Operations Department innovated and made improvements. Third-party testing labs were engaged to refute end-user performance concerns and induce confidence.Bottom LineThe shift in marketing strategy contributed significantly to turning around declining revenues into consecutive year-over-year sales increases of 20% and beyond. Identifying and targeting an expanding market segment supported this growth in sales. Increased market share remained a goal but was not required for significant recurring revenue increases.Companies that follow conventional wisdom run the risk of leaving core problems undiagnosed and fail to turn sales around. The strategic marketing process avoids this pitfall. Strategic marketing effectively gives the sales force an improved product to sell and a better market to sell it into, thereby propelling increased sales at a rapid rate.The company could not have sold its way out of declining revenues without first changing its go-to-market strategies. It needed to find a market opportunity that met its strategic imperatives and provided a focus point for success. Compelling marketing messages provided efficient market penetration in a way that selling by individuals or teams could not.If done innovatively, with an eye on costs, strategic marketing can be the fastest way to spur sales growth.