During the current economic climate, many businesses are realizing the importance of better financial education. It’s important that you understand the issues around cash flow, especially when you’re heading into a time of slowing sales or rising expenses, as many businesses are right now.
For companies that sell physical products and have a substantial amount of stock stored in warehouses, they may be overlooking a potentially important form of financing known as equity financing. Let’s explore that concept in more detail.
Equity financing: how it works
When a company seeks equity financing, it is looking for a loan that is secured against its shares. To assess the value of that stock, an external evaluator will be hired, who will assess the value based on multiple factors.
These factors include where the stock is located, what condition the items are in, the season and how that affects the ability to sell, and the value of the raw materials also stored in the facility. All of these factors are subject to change, which means that the financing agreement may also fluctuate.
Types of financing available
Equity financing is a relatively broad term that covers a wide range of different financing options. These include short-term loans, cash advances that are paid as shares are sold, and lines of credit that provide financing on an ongoing basis.
The common element among all of these options is that the loan is secured against a tangible asset: stock. This makes it relatively easy for lenders to assess how much they are willing to lend you, with a relatively high degree of certainty that they will be repaid one way or another.
Pros and cons of equity financing
As with everything, there are drawbacks and advantages to equity financing, which will make it a more attractive financing solution for some companies than for others:
- Improve stock management: One of the great side benefits of equity financing is that it encourages a positive approach to equity management. If you don’t already have an effective approach, this can increase the efficiency of your operations and minimize waste and damage.
- A quick boost to cash flowEquity financing offers a quick cash boost for your business, no matter the time of year. In some cases, this can be the difference between surviving a crisis and going under.
- Versatile: There are several different types of financing available, which can be secured against a wide variety of different stock types.
- not available to everyone: To be considered, you generally need significant amounts of stock. There are also other barriers, such as a good credit history and a strong balance sheet.
- High associated costs: not the cheapest financing solution; there are often high associated costs, especially the valuation itself.
While equity financing isn’t for everyone, for some companies it can be a major lifeline in tough times. It’s important to understand all of your potential options so that when you need them, you’ll be properly prepared.