Business to business financing
Business people are always looking out for new ideas to beat the credit crunch that is now an integral part of the global financial markets. The traditional ways of funding businesses may slowly fall by the wayside or lose their long held intrinsic value due to their inability to feed the hunger being experienced by investors and potential investors.
When we say traditional then we mean commercial banks, angel investors, venture capitalists, corporate venture capitalists, mezzanine lenders and maybe the government through grants.
If we are allowed to draw innuendoes from the crisis, then it is true to say that more people who are trying to seek financing will be turned away by the “traditional lenders”. Business to business finance, which is a not so obvious option to adopt, will gain relevance.
We say not so obvious because many business people will not have a full idea about this concept. It only means that funds from an existing business will be used to start or build on an already existing business. Let us look at some options.
Business to business funding options
An investor who is faced with the opportunity to fund his business by way of business to business finance has latitude to choose from the following:
- Ploughing back of profits
This method entails the using of a business’ gains to advance its stock or presence in the market. There will be no interest to be paid to anyone and no conditions to be met except for the logical requirement that these should ideally be used to buy long-term capital equipments or strengthen the capital reserves of the business. Profits can also be used to fund the start or acquisition of a new business.
- Initial public offer (IPO’s) and private placements
This business concept involves the sale of equity in the business for the purposes of raising capital for growth. IPO’s refers to the offering of a business’ shares (always a Company) to the public at large with a view of getting funds to expand your business. This process is exhaustive in terms of the parties involved and the legal and technical requirements imposed by legislation and the customs of particular jurisdictions.
Private placement on the other hand is when an investor invites other investors, and not the public, to bid for shares in a business (always company). When issuing shares to other businesses, it is critical to look beyond the money and see whether business governance matters will be affected.
- Pledging assets of existing business
Discussions about the need for collateral and the insistence by commercial banks and other lenders to have security for money advanced has left many investors disappointed. However, if you are a business owner then you can pledge of mortgage assets owned by the existing business for the purposes of securing a loan from a lending institution. Mortgaging and pledging of property possesses complexities which may need the assistance of lawyers and other professionals.
Franchising is the method of using another person’s business philosophy where the franchisor grants an independent business investor a right to distribute its products, techniques and trademarks for a percentage of the royalty fee and gross monthly returns (www.wikipedia.com). This mode will usually assist a business person to skip marketing of their business.
Investors who follow the thinking of the greatest business people will also discover that buying and selling of businesses at a profit is also a way of business to business financing. Whatever choice you make, be sure to seek professional guidance.
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