When to Finance Working Capital or Dilute Equity?
The best business strategy is to get equity financing when it is possible for you to negotiate and ideally dictate some terms. Preferably, absolute control remains with you—the business owner.
It is generally not a good plan to seek equity when your business is new, suffering from a major setback, or struggling to make a profit. It is unfortunate that most business owners look for an investor precisely when their business is not going through a good phase.
You should look for equity partners only once your business has a proven history of profitability, and there is a specific and identifiable need for money.
Working capital shortfalls are just a short-term financial problem that can be tackled with mezzanine debt or senior debt. Short-term financing is available, which look to certain inventory assets and accounts receivable as collateral. A mixture of these kinds of alternative solutions can improve your available working capital (WC) to the extent where the requirement for an equity partner goes completely out of the picture.
If you are eager to consider a capital injection to resolve your business’s early-stage difficulties, then you also have to think about possible partnership risks along the way. The most appropriate working capital solution is perhaps a line of credit business secures by offering up its accounts receivable to the factor, because this does not introduce any partnership risk.