Business Finance: Tips on how to Do It Yourself
In contrast to what most small business owners believe, financing a business is not rocket science. Actually, there are only three main ways to accomplish it: via debt, equity or what I call “do it yourself” financing. See Freight Bill Factoring Services.
Each method has benefits and drawbacks you should take note of. At various stages in your business’s life cycle, one or more of these methods may be appropriate. Therefore, a thorough knowledge of each technique is necessary if you think you may ever have to obtain financing for your business.
Debt and Equity: Pros and Cons
Debt and equity are what most people think of when you ask them about business financing. Traditional debt financing is normally provided by banks, which loan money that must be repaid with interest within a certain time frame. These loans normally must be secured by collateral just in case they can not be repaid.
The cost of debt is relatively low, particularly in today’s low-interest-rate atmosphere. However, business loans have become harder to come by in the current tight credit environment.
Equity financing is given by investors who receive shares of ownership in the company, as opposed to interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors. Although equity financing does not have to be repaid like a bank loan does, the cost in the long run can possibly be much higher than debt.
This is because each share of ownership you divest to an investor is an ownership share out of your pocket that has an unknown future value. Equity investors often place terms and conditions on financing that can hog-tie owners, and they count on a very high rate of return on the companies they invest in.
My preferred kind of financing is the do-it-yourself, or DIY, variety. And one of the best ways to DIY is by utilizing a funding technique called factoring. With invoice discounting programs, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a “factor”) at a discount. There are two key benefits of factoring:.
Drastically improved cash flow Instead of waiting to get payment, the business gets the majority of the accounts receivable when the invoice is generated. This reduction in the receivables delay can mean the difference between success and failure for companies operating on long cash flow cycles.
Say goodbye to credit analysis, risk or collections The finance company conducts credit checks on customers and evaluates credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also performs all the services of a full-fledged accounts receivable (A/R) department, including folding, stuffing, mailing and documenting invoices and payments in an accounting system.
Invoice discounting is not as widely known as debt and equity, but it’s often more helpful as a business funding instrument. One main reason many owners don’t consider invoice factoring first is because it takes some time and effort to make invoice factoring work. Many people today are seeking out immediate answers and immediate results, but stopgaps are not always offered or advisable.
Getting it to Work.
For invoice factoring to function, the business must accomplish one extremely important detail: deliver a top quality product or service to a creditworthy customer. Undoubtedly, this is something the business was created to perform in the first place, but it serves as a built-in incentive so the business owner does not forget what he or she should be doing anyway.
Once the customer is satisfied, the business will be paid promptly by the factor it doesn’t have to wait 30, 60 or 90 days or longer to get payment. The business can then immediately pay its suppliers and reinvest the profits back into the company. It can use these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will often more than offset the fees paid to the invoice factoring company.
By invoice factoring, a business can increase its sales, establish strong supplier relationships and strengthen its financial statements. And by relying upon the factoring company’s A/R management programs, the business owner can focus on expanding sales and improving profitability. All this can take place without increasing debt or diluting equity.
The average business factors for about 18 months, which is the period of time it usually requires to achieve growth objectives, pay off past-due amounts and strengthen the balance sheet. Then the business will likely be in a better position to look for debt and equity opportunities if it still needs to. Also see Freight Bill Factoring Services.