Written By: Matt Stavish, Vice President at Republic Capital Access
On a typical episode of Shark Tank, a contestant business owner lands a large contract that will change the trajectory of their company. The time-sensitive problem now arises: how to finance my new big order? The business owner often accepts an offer that involves giving up substantial equity in their company. Why?
Equity, the most expensive form of capital, should never be used to finance a contract that will turn into cash in under 120 days. Nevertheless, we frequently see business owners relinquish significant ownership when there are other, cheaper financing solutions.
Going back to Shark Tank – what could be done differently? Is there a solution to the problem that doesn’t include equity?
The solution lies with using short-term financing.
Two commonly used types of short-term financing are Purchase Order (PO) financing and Accounts Receivables (AR) financing. Used in combination they provide immediate, temporary liquidity without the dilution, or high cost, of equity. When compared to equity capital – both from an effective interest rate and opportunity cost perspective – PO and AR financing are powerful tools that allow a business owner to achieve unencumbered growth.
There are many industry-specific types of short-term financing available; some can depend solely on your company’s market or geography.
Where should you start your search for non-bank financing? A Bank. Talk to a good banker; they can typically point you in the right direction. And avoid the Internet. Thanks to Google it has never been easier to find financing sources. The Internet is not the best place to start your search for alternative financing.
As a business owner, you have worked incredibly hard to get the point of landing that first large contract, don’t forgo all that work and give up equity now – exhaust all your options.