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hallfxvt   , 26

from West New York


Business Capital: How You Can Do It By Yourself

Unlike what most small business owners believe, financing a business is not brain surgery. Really, there are only three major ways to do it: via debt, equity or what I call "do it yourself" finance.

Each and every technique has benefits and drawbacks you should know of. At various stages in your business's life cycle, one or more of these methods may be appropriate. Therefore, a complete understanding of each procedure is very important if you think you may ever have to obtain funding for your business.

Debt and Equity: Pros and Cons

Debt and equity are what most people imagine when you ask them about business financing. Traditional debt financing is often provided by banks, which loan money that must be repaid with interest within a certain timespan. These loans normally must be secured by collateral just in case they can not be repaid.

The cost of debt is pretty low, especially in today's low-interest-rate atmosphere. However, business loans have become more difficult to come by in the current tight credit environment.

Equity financing is offered by investors who receive shares of ownership in the company, rather than interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors. Though equity financing does not need to be repaid like a bank loan does, the cost in the long run can possibly be much more 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 chain owners, and they expect a very high rate of return on the companies they invest in.
DIY Financing

My absolute favorite kind of financing is the do-it-yourself, or DIY, variety. And one of the best ways to DIY is by using a financing technique called invoice discounting. With factoring 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 bolstered cash flow As opposed to waiting to get payment, the business gets most of the accounts receivable when the invoice is created. This reduction 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 scrutinizes credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also conducts 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 useful as a business financing instrument. One explanation many owners don't consider factoring first is because it takes a while and energy to make invoice discounting work. Many people today are searching for quick answers and immediate results, but stopgaps are not always readily available or advisable.
Making It Work.

For invoice discounting to function, the business must accomplish one essential thing: provide a top-notch product or service to a creditworthy customer. Of course, this is something the business was created to perform to begin with, 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 right away by the factoring company it doesn't need to wait 30, 60 or 90 days or longer to get payment. The business can then quickly 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 normally more than offset the fees paid to the factoring company.

By invoice factoring, a business can grow its sales, establish strong supplier relationships and enhance its financial statements. And by relying upon the invoice factoring company's A/R management programs, the business owner can concentrate on increasing sales and increasing profitability. All of this can occur without increasing debt or diluting equity.
The average business uses factoring companies for about 18 months, which is the period of 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 search for debt and equity opportunities if it still needs to.