Working Capital Financing

Written by Patricia Tunstall
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Any business, startup or otherwise, must have capital to be able to function and open its doors for business. Seed capital can get an enterprise off the ground and off to a running start. At various stages of growth, a business may need an infusion of capital in order to grow, improve cash flow, or pay current bills and expenses.

Equity Versus Debt

At whatever phase this need arises, owners/managers have a fundamental choice to make between going the equity route or incurring debt. If you own a business idea or company, you are the owner of a subjective value called equity. In fact, any intellectual or physical property can be equity, and its worth is determined by what someone is willing to pay for it.

Angel and venture capital are two kinds of equity financing that are commonly available to new and emerging businesses. These investors look for companies with potential for significant growth, and they take an active role in shaping company policies and management because of their investment. Needless to say, there is a high degree of risk in such investments, and angel and venture investors are experienced business people who want to protect their considerable stake in the health of the company.

Debt financing involves borrowing against your equity, not selling it. This is, perhaps, more familiar to smaller, private businesses, who often turn to loans and other traditional banking procedures. Although accounts receivable financing, or factoring, does not create any debt for a business, it does involve collateral--the unpaid invoices held by the business. These are the basis for the cash advances to the business that create the necessary working capital.


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