What's the Difference Between Venture Capital and working capital ...

It is not uncommon for

business owners suffering through a cash flow crunch to deter mine that bringing on an equity partner or investor, seeking as a venture capitalist or angel investor, will solve all their problems. Unfortunately, during my 28 years in the alternative business finance industry, I have seen many businesses fail due to this kind of thinking.

Specifically, these owners did not understand the difference between equity financing and working capital. I?ve seen good, profitable businesses Blow Themselves up because of cash flow problems, entrepreneurs and non-ownership and control of their companies before they had a chance to succeed. A lot of this grief could have been Prevented had opened their minds and the owners taken the time to seriously look at all the financing options that are available to them. Often, what these businesses really need is simply a in boost or access to more working capital. ?There is a big difference between increasing working capital and bringing on an equity partner,? says Davis Vaitkunas to an investment banker and President of Bond Capital in Vancouver, BC. ?While owners suffering from cash flow problems may think their only solution is a large injection of cash from an equity investor, that could very well be the worst possible thing to do, ?says Vaitkunas. ?In fact, the math will demonstrate trate that the owner who funds 100 percent of his or her working capital with equity earns a lower return on owner?s equity.? vs. working capital. Equity Financing

At this point it might be helpful to clarify some terms. For starters, ?working capital? is the money used to pay your business bills until the cash from sales (or accounts receivable) has actually been received. Terms vary among industries for sales, but normally a business can expect to wait somewhere between 30 and 60 days to be paid. Therefore, as a general rule, your business should retain two times its monthly sales in the form of working capital. You can increase the amount of available working capital by retaining profits, improving supplier credit, or using alternative financing vehicles.

?equity financing,? meanwhile, is money a business acquires by selling some of the ownership shares in the business. In many cases, this can also involve giving up control in some or all of the most important business decisions. This can be a good thing if the investor brings unique expertise in some or synergy to the relationship. However, the terms of an equity investment can be complicated, so it is important to completely understand them and have good legal counsel. Think of it as a business marriage. According to Vaitkunas, ?Businesses should use equity to finance long-term assets and working capital to finance short-term assets. You want to apply the matching principle and match the length of the asset life to the length of liability life. ? A long-term asset takes more than one 12-month business cycle to repay, while a short-term asset will normally be repaid in less than 12 months. When to Dilute Equity

?equity is a precious commodity, ?Vaitkunas stresses. ?It should only be sold when there is no other option. The equity partner should bring experience and / or contacts that can not be found elsewhere.? The best strategy is to secure equity financing at a time when you can negotiate and preferably dictate some of the terms. Ideally, absolute control should remain with the owner.

Timing is everything when it comes to equity financing, Vaitkunas continues. ?Sometimes it?s best to simply take your time and wait for the best value proposition. While you?re waiting, you can grow within your means using short-term liabilities.? Not

It?s usually a good idea to look for equity when a business is new, struggling to earn a profit or suffering from a setback. Unfortunately this is exactly the time when many business owners start thinking they need to ?find an investor.? This process can take a thumb lot of time and consume a lot of energy, Which are taken away from the business, and this can have an aggravating and compounding effect on the existing problems.

As a rule of, equity partners should only be sought once a company has a proven track record of sales and profitability and there is an identifiable and specific need for the money. Then, it is important to show how an injection of capital will create even greater profits and higher sales. A business that has a proven level of profitability, some historical sales growth and sales growth even more future potential is a much more attractive investment to potential equity partners. Financing Working Capital

Working capital shortages are a short-term problem-that can be financed with senior debt or mezzanine debt. In the alternative, short-term financing is also available from factoring or A / R financing providers who look to accounts receivable and inventory Certain assets as collateral. A combination of these types of alternative strategies can boost working capital available to the point where the need for an equity partner disappears.

So how do you decide Which financing tool to use for the job? ?If you are tempted to consider in equity injection to resolve growing pains, you must also consider possible partnership risk along the way and the true cost that equity can bring down the road,? says Vaitkunas. The best solution may be in working capital accounts receivable line of credit, Which costs less than equity and does not introduce partnership risk

The bottom line:. There are many alternative options available to businesses in need of a cash infusion other than taking on a partner or shareholder. It is important for every business owner to know and understand all of the decision options before making such important to. Knowing about all the options that are available, and understanding when it?s best to use which one could preventDefault-a lot of grief and hardship for a lot of business owners.

id=?article-resource?> Tom Klausen is the senior vice president of First Vancouver Finance in Vancouver, BC. Tom has had extensive experience in providing alternative financing solutions to small business owners, and thus provides business management consulting services to both traditional and non-traditional lenders throughout North America. He can be contacted at (604) 988-1490 or via email at TKlausen@fvf.ca .

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