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This paper is written to provide small business owners with an overview of the financial options
that are available for their businesses. However, this paper does not intend to provide financial
or legal advice as only qualified professionals can do so. The author and Commercial Capital
LLC disclaim all liabilities arising from the use of the information on this paper. Please consult
a professional before making an important decision about your personal or business finances.


Large companies have always had a number of options that they could depend on to raise capital
for their businesses. The have always had access to a number of alternatives such as selling
stock, issuing bonds, bank loans and accounts receivable financing among others. Looking at the
other side of the coin, smaller companies, those that have between $20,000 and $500,000 of
yearly revenues, have always had a challenge trying to find capital to operate their businesses.

The lack of access to capital has prevented many small businesses from growing and capitalizing
on the many opportunities that are available to them. It is not uncommon for small companies to
reject large deals or opportunities because they do not have the necessary capital to obtain the
resources to service the account. However, even when small businesses do take on large
contracts, they find that they are never paid immediately upon delivery of services. Most contract
terms demand that the supplier provide 30 to 60 days for the customer to pay their invoice - in
effect, forcing them to extend them with supplier credit. The lack of adequate capital resources,
along with the necessity to offer commercial credit to clients, creates a "perfect storm" that
prevents small businesses from growing and that is very difficult to avoid.

A number of these problems could be sidestepped if the company had immediate access to
working capital. Working capital could enable the business to add employees and resources to
serve new clients and larger contracts. It also enhances a company's ability to extend 30 to 60
day payment terms to their customers.

This white paper outlines the most common sources for working capital and provides an
evaluation of each source. Each source has also been assigned a score, which summarizes the
availability and flexibility of the source.

Scoring System
Each working capital source that has been evaluated has been given a score from 1 to 10. The
following features where considered when assigning a score:

o Accessibility to small businesses
o Requirement complexity (e.g. do they require significant financial reporting?)
o Flexibility
o Payment terms

A higher score indicates that the source of capital has a positive outlook on a number of these
criteria and is available to small businesses. A lower score indicates that a particular source
of capital may not be best suited for small businesses.

Financial Options

o Venture Capital – Score: 1
Many books and publications tout the benefits of obtaining venture capital to finance a
new or ongoing operation. Venture capital is an option for small companies that have a
seasoned management team and very aggressive growth plans, however, venture
capitalists will rarely invest in small businesses that have no intention of going public.
The venture capitalist objective is to invest in a company for a short period of time – say
5 years – and then cash out of the business while making a significant return on their

o Angel Investors – Score: 2
An Angel investor is a wealthy individual or group of individuals that typically invest in
pre-venture capital companies. That is, companies that don't meet the current
requirements of a venture capitalist but that could meet their requirements with a capital
and management influx. However, you should not rule out angel investors completely
since there are angel investment groups who focus on the growth of certain communities
and will invest in small businesses. The best way to find an angel investment group near
to you is to search them on the Internet using a search engine such as Google

o Banking Institutions – Score: 4.5
Most small businesses owners will first approach their bank to try and obtain a loan or
line of working capital. However, unless the business has been in operation for a number
of years, has substantial assets and all the appropriate financial records, their chances of
obtaining any financing are minimal. Banks, however, can provide lines of credit if the
business owner personally guarantees them. This means that the business owner will be
personally liable for the repayment of these loans. These lines of credit can provide the
business with the needed working capital; however they can be very risky, especially if
the business does not produce the expected results and the owner is unable to repay the
bank. Business owners should use this method of financing very cautiously.

o Credit Cards – Score: 6
Much like bank lines of credit, many business owners use their credit cards to fund their
businesses. Credit cards offer the ability to make purchases or obtain cash advances and
pay them at a later time. It should be noted that credit cards can be a very expensive
source of funding. Although most credit cards have reasonably low interest rates for
purchases, their cash advance rates can be as high as 17% to 19% due to greater
delinquency rates. Furthermore, most credit cards will charge you 2% to 4% of the face
value of a cash advance as a "fee". Much like bank lines of credit, the business owner
personally guarantees payment of a credit card. Thus, this method of financing can be
very risky if the business does not produce the expected results and the business owner
cannot repay the credit card company. Business owners should use this method of
financing very cautiously.

o Home Equity Lines of Credit– Score: 6.5
Business owners who are also homeowners have the option of tapping into their home
equity to finance their ongoing business operations. Home equity loans and lines of credit
have many advantages, such as low interest rates and the possibility of having some
portion of it deducted from taxes . This method of financing gained a lot of momentum
between the years 2000 and 2004 when interest rates where at their lowest point in
decades and real estate was appreciating in value. A major disadvantage if this financing
method is that it directly places the business owner's home at risk. In fact, the business
owner is placing a bet - with their home as the potential wager - that the business will
succeed and will be able to repay the loan. Much like lines of credit, business owners
should use this method of financing very cautiously.

o Small Business Administration – Score: 7
The US Small Business Administration ( provides a number of very viable
options to finance business operations. Although the whole scope of SBA services is
beyond the scope of this paper, the SBA provides a "Microloan" program. The program
objective is to stimulate micro-enterprises and provides loans of up to $30,000 to small
businesses. These loans are usually provided through a financial institution or a bank.
They have higher interest rates than traditional loans, but their requirements are more
flexible, making them more accessible to small business owners.

o Founders, Friends and Family – Score: 7
Friends and family are one of the most conventional ways of financing small businesses.
Many entrepreneurs have been able to leverage existing relationships and obtain funding,
either as a loan or as a capital investment, for their businesses. Although this source of
funding can be easier to obtain that others, it does have some inherent problems. First, the
business owner runs the risk of placing the relationship in jeopardy if things do not go as
expected and the business defaults. Furthermore, these transactions are usually done with
little formality and without written agreements, further complicating matters. If you elect
to use this funding option, you should consult an attorney and draw some formal
documents that describe the intent and responsibilities of each party.

o Accounts Receivable Financing – Score: 8
Accounts receivable financing, also known as factoring financing, has been a source of
working capital for large companies for many decades. Factoring enables a business to
sell their slow paying accounts receivable to a financial company, who in turn pays for
the invoices within 48 hours. After the sale, the financial company waits to be paid for
the invoices. A key feature of factoring is that the factor will take the credit strength of
the business' customers, as it's main consideration. Until recently, accounts receivable
financing was out of the reach of the small business owner. However, enhancements in
technology have now turned this method of financing into a viable alternative for small
businesses. This means that a small company with little or no credit can leverage a strong
roster of clients, sell their invoices and get funding very quickly. Factoring should be
considered as an option for businesses that sell products or services to other businesses,
rather than to consumers.

Obtaining capital for their businesses is one of the most important decisions that a business
owner can make. Like all important decisions, it should be carefully thought out and deliberately
executed. The old adage that "the best time to look for capital is when you don't need it" is still
true. You should spend some time researching the all available options for your business ahead
of time, so that you can be ready to "tap" your war chest when the right opportunity arrives.

About Commercial Capital, LLC
Commercial Capital, LLC is a leading commercial finance company that specializes in providing
working capital through factoring to small businesses. For more information or a free
consultation, please visit our web site at or call us at (786) 206 4722.

This article was submitted by - Marco Terry Please Rate/Review this Article - Recommend it to friends

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