The difference between venture capital and working capital
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.
It is not uncommon for business owners suffering through cash flow crunches to determine that bringing on an equity partner or investor, such as a venture capitalist or angel investor, will solve all their problems. Unfortunately, many businesses have failed due to this kind of thinking. Specifically, these owners did not understand the difference between equity financing and working capital. Often, what these businesses really need is simply a boost in or access to more working capital.
Tom Klausen is the senior vice president of First Vancouver Finance in Vancouver, BC. Klausen 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 e-mail at TKlausen@fvf.ca.