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I am sure you have heard this axiom: If you don’t know where you are going, you will get there. Many folks investing today are on that path: they are investing without proper knowledge of the stock market, of investment basics, and lacking simple, concise, written goals. Later, these folks will experience great challenges.Among other things, the Federal Reserve’s Quantitative Easing program, a euphemism for pumping money into the economy, is fueling rising stock markets. This could entice even more folks to invest in stocks because they might see opportunities to ‘make money.’ Beware; before investing, at least, ensure you dispel three popular investment myths, and understand the potential investment’s opportunity cost.
Investing in the stock market is gambling
Low priced stocks, especially those at 52-week lows are worth buying
Investment analysts and advisors know how investments will perform
Investing In The Stock Market Is GamblingSimplistically, investing is just another spending form. You buy a book, a car, a house, and you buy stocks, bonds, or other investment instruments. The key is to develop a solid process to follow instinctively before spending: a spending decision process. Your attitude will decide how you behave, and so, you could choose to spend on stocks and bonds – invest – with a gambling motive. That’s why I advise folks never to invest unless they fulfill specific prerequisites, such as being debt free with an established process to replace major assets for cash, and having clear, concise, written investment goals.Then again, even with clear goals, individuals need to know that consistent, solid earnings is the key sustainer of a business’ value, and ultimately, its stock market price.Low Priced Stocks, Especially Those At 52-week Lows, Are Worth BuyingHere is a trap to avoid. A stock is trading at its 52-week low, falling over 50%, and you think it presents a buying opportunity. Maybe; on the other hand, maybe not! Likely, that business’ products and services no longer have the capability to produce previously perceived earnings. Alternatively, investment analysts and others may have promoted this business because of some fad or other irrelevant reason. Yahoo! and Nortel are examples of companies whose stock prices traded at unsustainable levels; after the expected collapse, their stock prices did not recover. Many other examples exist, particularly on the Japanese stock exchange.As I mentioned above, as with all spending, we need to follow a spending decision process before investing. This will allow us to use a fall in stock price as a trigger to identify business’ fundamentals and potential investment opportunities.Investment Analysts And Advisors Know How Investments Will Perform When you listen to these folks, you might forget that they, like you and I, have no clue about the future. Some are in conflicts of interest, blinded, and pushing particular products. Others might be sincere but are relying on the past. And we know, the past might not be a good predictor of the future.Can these folks help? Certainly, but each client must try to understand whom his or her advisor represents, and accept that advisors do not know the future. Accordingly, folks receiving investment advice must be fully aware that they, not their advisors, need to decide when and how to act from advice they get.Before you start investing, dispel the above three myths, learn key investment basics, and learn and make sure you fulfill specific investing preconditions.This final point is obvious but often folks overlook it. Investing in the stock market has an opportunity cost; it reduces, by amounts invested, funds available for other purposes. Ten thousand dollars invested in the market could buy a car, pay a portion of a college semester’s fees, or be donated to charity. Therefore, as part of your spending decision process, ask these three questions before deciding to invest:
What other alternatives exists to use funds you are about to invest?
Given your present and expected situation, is this the best use of funds today?
Will you need to replenish these funds to carry out other specific goals in the next three to five years?
© Copyright 2013, Michel A. Bell

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.

In today’s uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult – especially for start-up companies and those that have experienced any type of financial difficulty. Sometimes, 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 or the purchase of long-term assets, which are defined as assets that are repaid over more than one 12-month business cycle.

But the biggest drawback to bringing equity investors into your business is a potential loss of control. When you sell equity (or shares) in your business to venture capitalists or angels, you are giving up a percentage of ownership in your business, and you may be doing so at an inopportune time. With this dilution of ownership most often comes a loss of control over some or all of the most important business decisions that must be made.

Sometimes, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don’t usually pay interest with equity financing. The equity investor gains its return via the ownership stake gained in your business. But the long-term “cost” of selling equity is always much higher than the short-term cost of debt, in terms of both actual cash cost as well as soft costs like the loss of control and stewardship of your company and the potential future value of the ownership shares that are sold.

Alternative Financing Solutions

But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:

1. Full-Service Factoring – Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.

2. Accounts Receivable (A/R) Financing – A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.

3. Asset-Based Lending (ABL) – This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.

In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:

It’s easy to determine the exact cost of financing and obtain an increase.
Professional collateral management can be included depending on the facility type and the lender.
Real-time, online interactive reporting is often available.
It may provide the business with access to more capital.
It’s flexible – financing ebbs and flows with the business’ needs.
It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches – these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.

A Precious Commodity

Remember that business equity is a precious commodity that should only be considered under the right circumstances and at the right time. When equity financing is sought, ideally this should be done at a time when the company has good growth prospects and a significant cash need for this growth. Ideally, majority ownership (and thus, absolute control) should remain with the company founder(s).

Alternative financing solutions like factoring, A/R financing and ABL can provide the working capital boost many cash-strapped businesses that don’t qualify for bank financing need – without diluting ownership and possibly giving up business control at an inopportune time for the owner. If and when these companies become bankable later, it’s often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a commercial finance company that can offer the right type of alternative financing solution for your particular situation.

Taking the time to understand all the different financing options available to your business, and the pros and cons of each, is the best way to make sure you choose the best option for your business. The use of alternative financing can help your company grow without diluting your ownership. After all, it’s your business – shouldn’t you keep as much of it as possible?