Crunch : Forex Finance BlogIt is not uncommon for business owners suffering through a cash flow crunch to determine that bringing on an equity partner or investor, such 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, and entrepreneurs lose ownership and control of their companies before they had a chance to succeed. A lot of this grief could have been prevented had the owners opened their minds and 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 boost in or access to more working capital. “There is a big difference between increasing working capital and bringing on an equity partner,” says Davis Vaitkunas, 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 that the owner who funds 100 percent of his or her working capital with equity earns a lower return on owner’s equity. Working Capital vs. Equity FinancingAt 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 for sales vary among industries, 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 in some unique expertise 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 cannot 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.”It’s usually not 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 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 thumb, 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 even more future sales growth potential is a much more attractive investment to potential equity partners.Financing Working CapitalWorking 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 certain accounts receivable and inventory assets as collateral. A combination of these types of alternative strategies can boost available working capital 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 an 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 working capital solution may be an 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 options before making such an important decision. Knowing about all the options that are available—and understanding when it’s best to use which one—could prevent a lot of grief and hardship for a lot of business owners.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 also 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 or visit First Vancouver Financial Services.Article from articlesbase.comGE Cuts Annual as Well as 3Q Forecast; Financials Rebound on Paulson Plan Prospects; Washington Mutual May Seek Private Equity Bidders; Capital One, Fortress Investment Group, and Stifel Financial Still Down; Discover Financial, Red Hat, Nike, and Bed BatVideo Rating: 0 / 5More Capital One Finance ArticlesA bit of humor...Powered By WPJokeTags: 28 Years, Accounts Receivable, Angel Investor, between, Business, Business Bills, Business Finance, Business Owners, Capital, Cash Flow Problems, Crunch, difference, Equity Financing, Equity Investor, Finance Industry, Financing Options, Grief, help, Investment Banker, Knowing, Profitable Businesses, Starters, Survive, Vancouver Bc, Venture, Venture Capital, Venture Capitalist, Working, Working CapitalReal estate fund crunch forces cash scroungeFirms resort to structured debt from PEs, land sales to address repayment crisis; project exits, too, for some.Read more on Business Standard IndiaLoan guarantee fund, business centre to aid Oman’s start-upsExpected to be ready by early June, the 4,000sq m business centre will be set up in Knowledge Oasis Muscat’s new KOM 4 building and will include business incubators, electronic and physical libraries, structured training courses and evaluation initiatives for both entrepreneurs and their ideas.Read more on ZawyaWine Conference to address M&A outlook, direct sales, new mediaIncreased wine mergers and acquisitions activity anticipated this year likely won’t be dominated by troubled-finance sales, according to one of the experts at the Business Journal wine business conference Thursday.Read more on North Bay Business JournalA bit of humor...Powered By WPJokeTags: Bay Business, Business Centre, Business Conference, Business Incubators, Crunch, Evaluation Initiatives, Finance, Finance News, Finance Sales, Fund Business, Guarantee Fund, Latest, Loan Guarantee, Mergers And Acquisitions, Muscat, News, North Bay Business Journal, Physical Libraries, Start Ups, Structured, Structured Finance, Structured Training, Ups, Wine BusinessQuestion by Barry S: equity finance rather than debt finance in a credit crunch?Do you think that it might be a good idea for governments to pushing equity capital instead of debt capital to resolve the funding problems that businesses are encoutering due to the credit crunch. Is there a way that this could be done.Best answer:Answer by rob_sarianI think debt would be better, but the more important issue is to whom this debt should be made available to. I don’t think the bankers or those greedy individuals who took out loans they couldn’t afford should be offered such.If the government chooses to give out low-priced debt, the recipients should be those guys and businesses on Main Street that still have good credit scores and certainly the capacity to PAY. If someone took out a mortgage which they couldn’t afford (and which consequently kicked them out of their home), that blunder is going to show up on that individual’s credit history. Bailouts shouldn’t be offered to these guys. After all, if you make a wrong bet, you should live up to the consequences and face the music.Know better? Leave your own answer in the comments!A bit of humor...Powered By WPJokeTags: Blunder, Consequences, Credit, Credit Crunch, Credit History, Crunch, Debt, Debt Capital, Debt Finance, Equity, Equity Capital, Finance, Good Credit Scores, Governments, Greedy Individuals, Loans, Mortgage, Music, rather, Sarian, than, Those Guys, Wrong BetDeposit ‘War’ Fails to Ease Record Cash Crunch: India CreditIndia’s biggest banks are battling for deposits as they fall behind demand for loans amid the nation’s worst cash crunch on record.Read more on BusinessWeekA bit of humor...Powered By WPJokeTags: Biggest Banks, Businessweek, Cash, Cash Crunch, Credit, Crunch, Deposit, Ease, Fails, India, India Credit, Loans, Record, ‘War’Here we will show you the steps you need to take to become a currency trader from home and generate a great second income after around 2 weeks training and then make big profits in around 30 minutes a day. Let’s get started… My inspiration for writing this article was the “Turtle Experiment” where trading legend Richard Dennis trained a group of people to trade in just 2 weeks and they went on to earn hundreds of millions of dollars, showing anyone could learn to trade, if they want to. The 3 points enclosed, are the points Dennis stressed and you must take notice of them to, if you want to join the elite 5%, who make the big profits.Let’s look at how to work smart and get the right Forex education and win. 1. Accepting Responsibility and Gaining the Right Knowledge Most traders think that Forex trading is easy and they can follow a guru, mentor or Forex robot, with a simulated track record and win – but of course these traders lose. While you can gain knowledge from others, your success is built on your understanding and confidence and it has to be the right Forex education, not something based on simulations backwards which has never been traded. Generally, it should only take a couple of weeks to learn Forex trading, as it’s essentially simple to learn the basics. Success however comes from within and we will look at the easy part of learning Forex trading next and then the hard – but achievable part. The easy part first!2. Building Your Forex Trading Strategy for Success Your Forex trading strategy should be simple, as simple systems work best as they are more robust than complicated ones. The best way for novice traders to win is to use a breakout long term trend following strategy. All you need to do is learn about support resistance and momentum and you’re all set. Breakout trading works and will continue to work and was at the heart of the “Turtle Trading” methodNow we need to cover the hard part of Forex trading which is executing your plan. This is the problem most traders have and why the bulk of traders lose. Let’s take a look at why Forex trading discipline is so hard – but why success can be yours with the right attitude. 3. Executing Your PlanYou will hear the word discipline a lot, as the key to success and it is and most traders think you just get discipline but you don’t! You only get it from confidence in what you are doing and that’s why you are the only person who can give yourself success. Discipline is the trait that allows you to take loss after loss for weeks or months on end and emerge a winner. Forget, what you read online about you won’t have long losing periods, you will – even the best traders encounter them. In these periods you must keep losses small and carry on executing your plan, as the market makes you look foolish and gives you lots of losses. If you can’t execute your trading system with discipline, you don’t have one! It’s hard to stay on track through losses – but possible with the right attitude. Success is within your Grasp!Most traders simply want to follow others and not accept they are responsible for their actions. If you accept your financial destiny is in your hands and you know you need to lose short term to win long term, Forex trading success is in your sights. All you need is the right knowledge and the right mindset and you can win – it sounds simple but most traders cannot do it. Always remember the market doesn’t beat the trader, the trader beats himself and this has been true since trading began. So get the right Forex education, work smart, get the right mindset and you can win – it really is that simple.A bit of humor...Powered By WPJokeTags: 30 Minutes, Beat, Become, Credit, Credit Crunch, Crunch, Currency, Currency Trader, Forex Trading, Guru, Mentor, Momentum, Novice Traders, Profits, Richard Dennis, Right Knowledge, Robot, Simple, Simple Steps, Simulations, Steps, Support Resistance, Term Trend, Trader, Trading Strategy, Trend Following Strategy, Turtle, Turtle Trading
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