There are several potential financing options available to cash-strapped businesses that need a healthy dose of working capital. A bank loan or line of credit is often the first option that owners think of — and for businesses that qualify, this may be the best option.
Sometimes, however, owners of businesses that don’t qualify for a bank loan decide that seeking venture capital or bringing on equity investors are other viable options.
But are they really? While there are some potential benefits to bringing venture capital and so-called “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t think about these drawbacks until the ink has dried on a contract with a venture capitalist or angel investor — and it’s too late to back out of the deal.
Different Types of Financing
One problem with bringing in equity investors to help provide a working capital boost is that working capital and equity are really two different types of financing.
Working capital — or the money that is used to pay business expenses incurred during the time lag until cash from sales (or accounts receivable) is collected — is short-term in nature, so it should be financed via a short-term financing tool. Equity, however, should generally be used to finance rapid growth, business expansion, acquisitions...Read More
