What Every Entrepreneur Should Know: How Working Capital Differs From Venture Capital
Every business, irrespective of the industry, will need urgent cash at some point when the bank account is close to running dry. In this trying time, the entrepreneur typically looks for a large injection of equity to keep the business alive and, in the process, forgoes more than what he/she bargained for-a slice of ownership. This depends upon the type of capital investment the entrepreneur decides to go for, which are primarily of two kinds: working capital and venture capital.
Working Capital Vs. Venture Capital
Working capital is a short-term financial instrument that is used to run the day-to-day activities of a business. Working capital is financed from the sale proceeds of the company itself. On the other hand, venture capital is the investment of capital by investors who see long-term growth potential in the business. While this is usually a larger sum that doesn’t eat into the company’s revenue, venture capital involves loss of ownership interest for the promoter.
When do you need Working Capital?
When your business has accounts receivable, i.e. when sales have been made but payments are still pending, you may find that you are running low on cash to meet daily expenses. In this situation, you need to raise working capital to keep the business afloat. The best solution is to follow up with the business creditors to release payments. Generally, when the business has a large number of creditors, getting some of them to clear their dues should be easy, providing the business with funds for working capital. In case this doesn’t work, it is best to approach a lender to borrow short-term funds to help your business tide over the cash crunch.
Lenders will examine the past performance of the business and the owner’s credit history, among other variables, and be able to fund you through immediate cash shortage. Some lenders offer innovative products to meet short-term finance needs and will also provide funds against accounts receivable.
When do you need Venture Capital?
Venture capital is the investment made by an investor in the first stages of the company’s growth. Depending on their core strength, the investors will focus on specific stages of a company’s growth. At the first stage, also called the ‘seed stage’, the venture capital helps to get the start-up off the ground. At this stage, the business may have little or no income at all. The second stage is called the ‘early stage’ where the business is starting to grow with some revenue-showing promise. Finally, the ‘growth stage’ is when you focus on making the business reach its full potential and become highly profitable. Any investment by a venture capitalist at any stage is against ownership. This ownership can be simple stock or preferred stock.
Taking venture capital investment may seem more in-trend, but it comes with a long list of riders and in some cases shared decision-making. If as an entrepreneur you are sure about your business, it is best to consider a working capital loan or a business loan to fund your working capital needs. As long as your business has been in existence for at least 3 years, you will get a Working Capital Loan or a business loan without a problem, provided your finances are in order and your business plan for the future is chalked out.
Lenders today are eager to help SME businesses as they are typically backed by strong entrepreneurs and offer an innovative solution or product for today’s market. When researching for an able lender, consider Bajaj Finserv, which offers working capital loans for small businesses and SMEs with minimal documentation. It also provides a Business Line of Credit in case you do not need the entire amount at one time.