Alternative Financing Vs. Venture Capital: Which Option Is Best for Boosting Working Capital?

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?

SPDN: An Inexpensive Way To Profit When The S&P 500 Falls

Summary
SPDN is not the largest or oldest way to short the S&P 500, but it’s a solid choice.
This ETF uses a variety of financial instruments to target a return opposite that of the S&P 500 Index.
SPDN’s 0.49% Expense Ratio is nearly half that of the larger, longer-tenured -1x Inverse S&P 500 ETF.
Details aside, the potential continuation of the equity bear market makes single-inverse ETFs an investment segment investor should be familiar with.
We rate SPDN a Strong Buy because we believe the risks of a continued bear market greatly outweigh the possibility of a quick return to a bull market.
Put a gear stick into R position, (Reverse).
Birdlkportfolio

By Rob Isbitts

Summary
The S&P 500 is in a bear market, and we don’t see a quick-fix. Many investors assume the only way to navigate a potentially long-term bear market is to hide in cash, day-trade or “just hang in there” while the bear takes their retirement nest egg.

The Direxion Daily S&P 500® Bear 1X ETF (NYSEARCA:SPDN) is one of a class of single-inverse ETFs that allow investors to profit from down moves in the stock market.

SPDN is an unleveraged, liquid, low-cost way to either try to hedge an equity portfolio, profit from a decline in the S&P 500, or both. We rate it a Strong Buy, given our concern about the intermediate-term outlook for the global equity market.

Strategy
SPDN keeps it simple. If the S&P 500 goes up by X%, it should go down by X%. The opposite is also expected.

Proprietary ETF Grades
Offense/Defense: Defense

Segment: Inverse Equity

Sub-Segment: Inverse S&P 500

Correlation (vs. S&P 500): Very High (inverse)

Expected Volatility (vs. S&P 500): Similar (but opposite)

Holding Analysis
SPDN does not rely on shorting individual stocks in the S&P 500. Instead, the managers typically use a combination of futures, swaps and other derivative instruments to create a portfolio that consistently aims to deliver the opposite of what the S&P 500 does.

Strengths
SPDN is a fairly “no-frills” way to do what many investors probably wished they could do during the first 9 months of 2022 and in past bear markets: find something that goes up when the “market” goes down. After all, bonds are not the answer they used to be, commodities like gold have, shall we say, lost their luster. And moving to cash creates the issue of making two correct timing decisions, when to get in and when to get out. SPDN and its single-inverse ETF brethren offer a liquid tool to use in a variety of ways, depending on what a particular investor wants to achieve.

Weaknesses
The weakness of any inverse ETF is that it does the opposite of what the market does, when the market goes up. So, even in bear markets when the broader market trend is down, sharp bear market rallies (or any rallies for that matter) in the S&P 500 will cause SPDN to drop as much as the market goes up.

Opportunities
While inverse ETFs have a reputation in some circles as nothing more than day-trading vehicles, our own experience with them is, pardon the pun, exactly the opposite! We encourage investors to try to better-understand single inverse ETFs like SPDN. While traders tend to gravitate to leveraged inverse ETFs (which actually are day-trading tools), we believe that in an extended bear market, SPDN and its ilk could be a game-saver for many portfolios.

Threats
SPDN and most other single inverse ETFs are vulnerable to a sustained rise in the price of the index it aims to deliver the inverse of. But that threat of loss in a rising market means that when an investor considers SPDN, they should also have a game plan for how and when they will deploy this unique portfolio weapon.

Proprietary Technical Ratings
Short-Term Rating (next 3 months): Strong Buy

Long-Term Rating (next 12 months): Buy

Conclusions
ETF Quality Opinion
SPDN does what it aims to do, and has done so for over 6 years now. For a while, it was largely-ignored, given the existence of a similar ETF that has been around much longer. But the more tenured SPDN has become, the more attractive it looks as an alternative.

ETF Investment Opinion

SPDN is rated Strong Buy because the S&P 500 continues to look as vulnerable to further decline. And, while the market bottomed in mid-June, rallied, then waffled since that time, our proprietary macro market indicators all point to much greater risk of a major decline from this level than a fast return to bull market glory. Thus, SPDN is at best a way to exploit and attack the bear, and at worst a hedge on an otherwise equity-laden portfolio.

10 Common Online Business Blunders

Because of the internet we all have the opportunity to make our own success and live the life of our dreams. But this does not mean that building a thriving internet business is easy or a way to “get rich quick”.Starting and building an established online business takes commitment, persistence, hard work, and the drive to make it succeed. Unfortunately many people are led to believe it is as simple as putting up a website, placing a few ads and watching the money pour in.That is exactly what I thought over 16 years ago when I first started online. I learned fast that building an online business would be much more than I ever imagined. While teaching myself how to make my business successful I made many mistakes. But I persisted and worked very hard. Then a very exciting thing happened. I started experiencing the benefits of success – both financially and personally. I find this work to be very rewarding in many ways and would recommend to anyone to stick with it and make it happen for yourself!Mistakes are a very valuable part of building a business if you learn from them. Use your mistakes to your advantage. Below are some of the most common mistakes we can make when developing an online business.1. Not Choosing Your Passion – In order to build a successful business you have to do something you are passionate about. It is hard to work 16 hours a day on something in which you are not interested. What do you love? What can you see yourself doing that you would not consider a “job”? I have always been a lover of books and wanted to own my own bookstore. The internet allowed me the opportunity to make this dream come true!2. Unrealistic Expectations – As I mentioned earlier, so many people are misguided into believing that making money online is quick and easy. Please do not fall into this trap! Make sure you are ready and able to put the time and effort into your business. Be prepared to work months or even years before reaping the benefits of success. Expecting unrealistic success is one of the main reasons people give up too quickly.3. Too Much Preparing, Not Enough Doing – It is a good idea to plan for your business but at some point you actually have to start doing something to get your business going. I know one lady who spent years going to seminars, paying money for complete business packages, buying books, etc. In all this learning, listening and paying out money, she never did start a business. This is also an easy trap to fall into. Yes, you do need to do research and learn but don’t make that your business.4. Too Much Flash – A business website should be clean, sharp, easy to navigate and professional. Don’t buy into the idea that you need music, flashing lights, or excessive clutter on your site. If you do offer music or a video give people the choice to listen or watch. Don’t have it automatically play when a visitor arrives. Don’t put too many banners, ads or flashy graphics on your site either. This will only result in slow loading time and losing visitors.5. Being Too Personal – Although a small personal touch added to your business is a good thing, don’t fill your site with pictures of friends, family vacations, or your life in general. Don’t overdo on telling of family stories, get-togethers, etc. Business and personal life must maintain a degree of separation. Create a personal bond with your customers but don’t overload them with your own personal life.6. No Online Support – Don’t try to go it alone. Contact other online entrepreneurs. Join groups. Network and obtain support from business associates. When I first started I knew a lady online who encouraged me to start my own newsletter. I had many doubts but she convinced me I could do it and that was a big step towards my success. I will never forget her or the help she gave me when I needed it. You can find many more experienced online business owners who will gladly help beginners and other business owners.7. Treating Your Business Like a Hobby – I have seen this so many times. People mistakenly start an online business thinking they can work it when they have the time. They say their family comes first and will get to it when they can. This is definitely not true. Your business needs your full attention and you must give it the time it needs to flourish. Yes, my family came first as well which is exactly why I started online. You cannot treat your business as a, “I’ll get to it when I can” project.8. Doing Too Much – Another unfortunate trap I have seen many people get caught in is signing up for multiple business opportunities and thinking they can make them all work. I have seen people trying to run as many as five different businesses. Spreading yourself too thin will accomplish nothing. You should decide on one business at which you will work your hardest and focus your complete attention on making it a success.9. Not Keeping Up to Date – Running a business is an ongoing process. You need to always be learning, studying new marketing techniques, watching your competitors, etc. Don’t fall into the “if it works, don’t fix it” routine. Just because your methods are working now, doesn’t mean they always will. You have to keep on top of things!10. Grammar and Spelling – This is an oldie but a goodie! Over the years I have seen some grievous errors in spelling and grammar. Please be sure to proofread and correct any mistakes made. If necessary, have someone else proofread for you. Fresh eyes can catch mistakes you may have missed. I have made some of these mistakes as well so I regularly have someone proofread my work. If you are not sure of the spelling of a word or proper use of grammar, look it up. Your business and your reputation are certainly worth the extra effort!I have made several of these errors and have definitely learned from them. Developing an online business can certainly be overwhelming and frustrating at times but if we commit to it, we can do it. Do not give up! Make your dream come true!