There are lots of potential financing options readily available to cash-strapped corporations that need a healthy serving of working capital. A bank loan or line of credit is often the first alternative which users think of - and for companies that qualify, this may be the most suitable choice.
In modern uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult
- especially for start up companies as well as those who have experienced any kind of financial trouble. Often, owners of companies that don't qualify for a bank loan decide that seeking venture capital or even bringing on equity investors are many other worthwhile options.
But can they be really? While generally there a few likely benefits to bringing venture capital and so-called "angel" investors into the small business of yours, there are drawbacks also. Unfortunately, owners usually do not consider these drawbacks till the ink has dried out on a contract and have a venture capitalist or perhaps angel investor - and it is way too late to back out of the deal.
Different Varieties of Financing
One problem with bringing in equity investors to help provide a working capital increase is the fact that working capital and article (this website
) equity are actually two individual kinds of financing.
Working capital - or maybe the cash that's employed to be charged business costs incurred throughout time lag until money from sales (or accounts receivable) is collected - is short-term in nature, therefore it should be financed via a short-term funding tool. Equity, however, should typically be utilized to finance rapid growth, company expansion, acquisitions or the purchase of long-range assets, that are described as assets which are repaid over around one 12-month business cycle.
Though the most significant drawback to bringing equity investors into your business is a potential loss of control. When you promote equity (or maybe shares) in your business to venture angels or capitalists, you are giving up a fraction of ownership in your company, as well as you may possibly be this at an inopportune time. With this particular dilution of ownership frequently comes a loss of command over some or most of the most significant business decisions that have to be made.
Often, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don't typically pay interest with equity financing. The equity investor gains the return of its through the ownership stake gained in your company. although the long-range "cost" of marketing equity is always higher than the short term expense of debt, in terms of both real funds
cost as well as smooth costs which include the loss of stewardship and control of your organization along with the potential future value of the ownership shares that are sold.