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Gaining Funding Without Giving Up Equity: It Is Possible

Gaining Funding Without Giving Up Equity: It Is Possible

by Doc LundbergSeptember 19, 2015

All businesses operate with aspirations and hopes for the future of their company—dreaming of huge profits and being a leader in their industry. Perhaps the best way to achieve the ultimate result from your company is to land a huge order from a Fortune 500 company. The cash generated from that sale can be the thing that drives your business forward, giving you the finances, market presence, and potential for future business that you need to thrive.

Unfortunately, when operating a small or medium sized business—the chances are that you won’t have the cash readily available to cover the costs of sourcing components, manufacturing products, and delivering them to the customer. You’re suddenly in a position of sink or swim—if you can’t find the cash to finance the order fast, then you could lose the deal, and incur significant damage to your reputation, not to mention the opportunity cost of missed profits. Often, panicked companies turn to restrictive loans and equity agreements as a way of funding their future—but this isn’t always the best idea.

The Issues with Giving Up Equity

One way that companies can quickly generate the finances they need to facilitate a large order, is by looking into venture capital, or private equity—money provided by wealthy investors to help small businesses and startups progress with their company growth. Although, on the surface, investor money can seem like a good idea—it’s not as simple as you might assume. First of all, you’re presented with the challenge of finding an investor who is not only invested enough in the idea of your business to give you funds—but also values your business concept in a way that is similar to your own perceptions. The downside of venture capital or private equity is the investors will want oversight and in some cases out right control.

The term “equity”, in business, is the portion or value of the business that you own on paper. For instance if you have 100% equity in a home, with no mortgage or loan to consider, then you’d be able to sell that house without owing cash to anyone else—all of the profits would be yours. However, when you agree to an equity investment, you’ll be effectively giving away part of your company ownership—as well as some of the authority associated with making decisions in the future. If and when your business does take off—something that is often the case after you’ve achieved a huge initial order—you’ll share a significant percentage of your profits with your investor—distributing earnings over time that could exceed the amount you’d usually repay on a loan.

How to Avoid Giving Up Equity

Many of the more “conventional” forms of finance available to small businesses and startups, including lines of credit and loans offered by banks, are generally quite difficult to come by. Financial institutions require businesses to prove that they can pay the money back within a certain amount of time, through the presentation of cash-flow spreadsheets, financial statements, and available collateral. Unfortunately, however—these things are not always available to the time constrained business owner. Purchase order financing, on the other hand, is a form of financing that works between the businesses within a supply chain—offering temporary capital that covers the costs of shipping and manufacturing products. Because it isn’t a loan, purchase order financing can be an ideal opportunity for startup businesses, as it distributes capital according to the quality of the receivable and purchase order—not the evidence of profitability within a company.

To access purchase order financing, companies don’t have to give up equity or pay back huge amounts of interest. The purchase order finance company that the company works with, agrees to pay the supplier via credit or cash for the materials required to facilitate a certain order. Once the customer pays for the order, the PO financing company—alongside a finance fee, will receive the money advanced to your suppliers.

The Benefits of Purchase Order Financing

Although receiving a huge order can be a dream-come-true for any startup company, it’s important to remember that big jobs will always incur big costs at the beginning. Although you will eventually make up for the expenses when your customer pays for their order, you will first need to buy supplies, pay for manufacturing, give wages to workers, and cover any related expenses in packaging and shipping products. Often, the fact that businesses don’t receive payment until after completing the job makes large orders seem like an impossible task. However, PO financing gives small businesses the opportunity to manage larger workloads through the use of advancements. In other words, purchase order financing can help you to grow your business.

Most companies find that purchase order financing is also quite a convenient way of managing finances, as most PO financing solutions will collect payment from your client for you—reducing the amount of stress on the backs of small-businesses. You will simply receive the money owed from your client, minus the fees that you agreed to pay.

Funding Your Business

Purchase order financing may not be the perfect solution for every business. Often, it works best with companies that sell products capable of bringing in a high gross profit margin of 20% or above, which can make it less effective for companies buying and selling products with lower margins. However, in spite of this, the option of PO financing delivers numerous advantages to growing businesses, from reducing their need to take out costly loans, to helping them grow into bigger, more profitable organizations.

Perhaps most importantly, PO financing gives businesses the chance to get their foot in the door of their chosen market, without having to give away a portion of their business, or relinquish control over the future of their company. Purchase order financing lets you keep 100% of your equity so that your future belongs to you—and you alone.

How do you feel about the concept of purchase order financing? Have you used this form of funding to start up your business? Let us know in the comments.

About The Author
Doc Lundberg
Doc Lundberg
As the Director of Finance at Meridian PO Finance, Mr. Lundberg has management responsibility for Finance Department services and activities including capital and banking relationships, treasury management and transaction oversight. Lundberg provides critical deal structure, analysis and oversight of transaction deal flow and funding. He has expertise in debt and equity structuring, cash flow management, capital management and credit analysis.