As a business grows, the subject of obtaining working capital becomes a question in the forefront. Of course, business owners will seek the most beneficial and cost-effective way for their business to succeed, but sometimes, the obvious solution comes from not knowing the options. So, in what situation is choosing asset-based lending or factoring more beneficial than equity financing?
Let’s start with a company. Our hypothetical business is growing and succeeding and in their cash flow planning, they realize they will need additional capital to support their working capital needs. They look at the following options.
Equity Financing
Equity financing is appropriate when the business is trying to ramp up significantly past the business’s ability to generate short-term assets that can be borrowed upon. For example, if you are trying to be the next $50,000,000 a year business and hire 100 people for growth, well, then we say raise money. However, if you are like most entrepreneurs, you have given your blood, sweat and tears to a business to get it up and running. Your success is now ramping your business to the point of growth and you realize because of a big contract you just signed, additional capital is going to be necessary to get you from $2,000,000 a year to $5,000,000 a year. This is the type of company we are referring to.
Cost of equity financing & things to consider:
- What % of the profits will you negotiate selling forever and ever?
- How do you feel about loss of control? Equity wants a say in how you run your business.
- Is this enough capital to help you continue to ramp up?
- Can you comply with their reporting?
- Do they want a board seat?
- Do you agree with their valuation?
- Could you do it on your own?
- What if growth does not happen?
- What do you REALLY want out of your company?
We know for sure that equity has its place. We refer companies to equity providers all the time, but we want you to consider the alternatives first.
Far West Capital’s Asset Based Lending Solution
Things to consider:
- Most of the time, it is cheaper than selling part of your company.
- Solid way to finance growth when receivables grow faster than cash flow.
- Less risk to you as the entrepreneur.
- More flexibility – Use it if you grow. Don’t use it if you don’t need it.
- More Control – We don’t tell you how to run your company.
- You can pay us off when the time is right.
The bottom line is we sit down with you to help you consider these options. Our suggestion to the entrepreneur is always:
Grow your business only if it creates more cash flow for you, the owner. We can show you how. What is the best way to create more cash flow? More often than not, it is much “cheaper” to utilize your assets to borrow off than to dilute yourself. We work through the numbers to help you see that. If our solution is that option, we will tell you. If not, we will tell you. Call us to help you evaluate the best option for your company.
