If you are looking to grow your business, you are likely looking for ways to build up your cash reserves. Small businesses need significant cash reserves to grow, but unfortunately, in today’s business climate, business owners have trouble growing their reserves. To alleviate this problem many small business owners turn to others for financing. Two popular ways for small business owners to gain access to money include financing through equity, as well as financing through factoring. Below we will explain each of these financing methods.
Equity Financing Defined
Equity financing is defined as raising cash through selling shares of a business to investors. Equity financing is much different than debt financing where you receive funding that must be paid back over a period of time, usually with interest. Equity financing involves investors putting money into a business where they become owners of that business. Most equity investors will expect a return on their investment within 3-5 years.
For small business owners, the typical source of equity financing is that of friends or family. Business owners will typically pay their friends or family back once a business is off the ground, which could typically take a few years.
For larger businesses, venture capitalists and angel investors sometimes will invest in companies. Angel investors use their own money when investing, typically during the startup phase of a business.
Venture capitalists often invest in businesses in the early stages of growth and are often looking to invest much larger amounts of money into growing businesses. Venture capital is typically not private, like angel investments.
The obvious downside to equity financing is that you are giving up a portion of your business to potential investors.
Invoice Factoring Explained
Invoice factoring, on the other hand, is a much different type of financing. With invoice factoring small businesses are able to obtain financing based on the amount of money that they are owed from their customers or clients. This allows companies to bridge the gap, which is typically difficult for small businesses that have not had a chance to build up much cash reserves.
With accounts receivable factoring, business owners do not have to worry about giving up any equity related to their business. Typically, factoring financing is given based on the amount of accounts receivable that a business has at any given time. Usually 70% – 90% of the invoiced amount is given to the business owner initially. When the final bill is paid, the balance of the invoice is paid to the business owner, less the factoring fee.
One of the primary benefits of factoring is the speed with which small businesses are able to obtain funding. Typically a business can have funding in hand within 24-48 hours, which is much quicker than equity financing arrangements.
Contact Overnite Capital for Your Factoring Needs
If you have a large amount of accounts receivable, invoice factoring may be a great way to improve your cash flow. For more information, give our office a call today at 800-957-4309.