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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.

 

DIY Financing

 

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

 

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