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Business Financing: Tips on how to Do It Yourself
Contrary to what most small business owners believe, funding a business is not rocket science.
Really, there are only three main ways to accomplish it: via debt, equity or what I call "do it
Each approach comes with benefits and drawbacks you should understand. At various stages in
your business's life cycle, one or more of these methods may be appropriate. Therefore, a
thorough knowledge of each procedure is very important if you think you may ever need to secure
financing for your business.
Debt and Equity: Pros and Cons
Debt and equity are what many people imagine 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 often must be secured by collateral just in
case they can not be repaid.
The cost of debt is reasonably low, particularly in today's low-interest-rate setting. However,
business loans have become tougher to come by in the current tight credit environment.
Equity financing is given by investors who receive shares of ownership in the company, in lieu of
interest, in exchange for their money. These are typically venture capitalists, private equity firms
and angel investors. Even though equity financing does not need to be repaid like a bank loan
does, the cost over time can 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 funding that can hog-tie owners, and they expect 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 financing technique called receivable factoring. With invoice discounting
products, companies sell their outstanding receivables to a commercial finance company
(sometimes referred to as a "factor") at a discount. There are two key advantages of factoring:.
Substantially improved cash flow Rather than waiting to get payment, the business gets the
majority of the accounts receivable when the invoice is produced. This decrease in the
receivables delay can mean the difference between success and failure for companies operating
on long cash flow cycles.
Say goodbye 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 carries out 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.
Factoring is not as well-known as debt and equity, but it's often more helpful as a business
financing resource. One justification many owners don't consider factoring first is because it takes
a while and effort to make invoice factoring work. Lot of people today are seeking fast answers
and immediate results, but stopgaps are not always accessible or advisable.
Getting it to Work.
For Trucking Factoring Companies to work, the business must accomplish one critical thing:
deliver a top quality product or service to a creditworthy customer. Obviously, this is something
the business was created to perform anyway, but it acts 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 instantly by the factoring company it
doesn't have to wait 30, 60 or 90 days or longer to receive payment. The business can then
without delay 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 generally more than offset the fees paid to the factor.
By invoice factoring, a business can boost its sales, establish strong supplier relationships and
strengthen its financial statements. And by relying on the invoice factoring company's A/R
management products, the business owner can concentrate on expanding sales and improving
profitability. All of this can occur without increasing debt or diluting equity.
The typical business uses factoring companies for about 18 months, which is the time it usually
takes to accomplish growth objectives, pay off past-due amounts and boost the balance sheet.
Then the business will likely be in a better position to look for debt and equity opportunities if it still
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