What’s the best way to manage working capital needs?

Answered by: Michael Lock, Advisor

Category: Partnership & Fundraising

Here are some thoughts on raising capital:

First, before discussing the raising of capital, we recommend looking at your business terms and collection policies. Some technology companies have been lax in this area and if you have a situation where you require significant capital to fund orders, you should examine your terms and see if customers would be willing to pay some portion of the invoice at contract as opposed to on delivery. Also, work to develop strong operations around billing and collections. Too many companies are deficient in this area and this causes capital issues that could be avoided.

Second, using working capital loans to fund orders is a very viable option, it allows you to fund your business without giving up equity ownership. These loans are available, but do require a stronger balance sheet, a record of predictable revenue and collections, and can sometimes require personal guarantees.

Thirdly, Venture Capital is used predominantly to fund the growth of the business, but obviously can be used to fund working capital. Venture capital isn't for the mom-and-pops out there. You need to aim to build a company worth hundreds of millions of dollars to make sense as a candidate for venture funding. Its obvious advantage is that it is equity and not a loan. It does not require repayment or debt servicing. It does require entrepreneurs to give up some ownership in their company.

Lastly, there is a category of funding called Venture Debt that is available to Venture funded companies. Companies can often borrow up to 30% of the funded venture round. Venture debt, also known as venture lending, refers to a variety of debt financing products offered to early and growth-stage venture capital-backed companies. Provided by technology banks and dedicated venture debt funds, venture debt generally consists of a three to four-year term loan or equipment lease. When structured appropriately, venture debt can be an attractive financing option since it results in less dilution. Venture debt lenders do not require board seats and the diligence process is less exhaustive.