The Three Risks You Need To Protect Your Family From

Let’s face it, there are some things in life that can happen that we have very little control over, and because of this it is imperative that we are prepared for any of the following risks because our family is counting on us.1. The Risk of Dying Too SoonOut of the three risks, this is probably one of the least likely ones to happen to us; however we have all heard stories of people passing away unexpectedly or way too soon, so we need to prepare for the possibility. It is most important when we are younger, maybe have young kids or have people relying on our income and our savings may not be at the level where it can replace the income the family was relying on, if this is the case, we need life insurance. If you were to pass away unexpectedly, you wouldn’t want to add a financial hardship to your family on top of their emotional hardship.The best way to prepare for this risk is by getting a lower costing non-convertible Term Life Insurance Policy. Typically, you will need 8 to 10 times your income. You want non-convertible Term, because as your responsibilities start decreasing, you can start decreasing the amount of coverage you need and add that extra savings to more important areas of your finances, like your retirement – because, down the road, you are going to need more money than you are going to need life insurance. I mean, later in life you will not be able to go to the grocery store and buy your groceries with your life insurance policy – you are actually going to need money. So, you want to spend as little money as possible on life insurance without exposing your family to any unnecessary risk. That way you can invest more money and have a better chance at reaching all of the financial goals and dreams you have set for your family.

2. The Risk of Living Too Long Today, with medical technology the way it is, people are living much longer lives. People are living longer into their retirement, and many times they are outliving their money. This is why it is so important during our working years, only for the years we need it, we should be buying the cheaper Term insurance. This way we are not wasting our money in a product we don’t need and we can invest more money towards our retirement, and we can give ourselves a much better chance of not outliving our money.The goal should be to get to the point where our investments reach or exceed the amount that we need life insurance coverage for. When this happens we become self-insured and at this point we no longer need the life insurance anymore, thus, freeing up money to put towards our “Living Too Long” fund. Three great things happen for us when we become self-insured:We no longer have to pay life insurance premiums.

We do not have to die to get the money.

Our money can continue to grow – for us!3. The Risk of Becoming DisabledNow, this risk is the most important risk that you must prepare your family for because if you do it right, it has the potential of covering the first two risks as well. We hear stories all of the time of people doing the right thing their whole lives – they have the right life insurance for their family and they have been investing religiously. The problem is, they don’t die – they get very sick, become disabled or whatever – and now they suffer financially because they never prepared for this type of scenario. When this happens, a lot of times their income goes down or stops altogether while their medical bills stack up on top of their already existing bills. The main problem is that most people have all of their income coming in from one source, like a job, and if, for whatever reason, they are no longer able to work, then the money they were once relying on no longer comes in.Today, more than ever, it is important to prepare for this risk, because it is becoming more and more prevalent. A good way to prepare for this is while you are working your job, look for a part-time opportunity where you can start to build a pipeline of income that comes in whether you work or not – an opportunity where you can get paid, not only off of your own efforts, but also off of the efforts of other people. This way you can get to the point where you are making the same amount of money or even more while possibly spending half the time, a third of the time or eventually, maybe even no time at all, and the money continues to come in. This way if you do become disabled, income can still come into your family without you working at all. And if you build your business right, the money can actually increase and take on a life of its own even while you are away from it.

By building a pipeline of income, you are, in essence, preparing for the first two risks as well. If you were to die too soon, that pipeline of income could keep coming in long after you are gone and if you were to live too long, that pipeline of income could ensure that you never outlive your money.

Alternative Financing Vs. Venture Capital: Which Option Is Best for Boosting Working Capital?

There are several potential financing options available to cash-strapped businesses that need a healthy dose of working capital. A bank loan or line of credit is often the first option that owners think of – and for businesses that qualify, this may be the best option.

In today’s uncertain business, economic and regulatory environment, qualifying for a bank loan can be difficult – especially for start-up companies and those that have experienced any type of financial difficulty. Sometimes, owners of businesses that don’t qualify for a bank loan decide that seeking venture capital or bringing on equity investors are other viable options.

But are they really? While there are some potential benefits to bringing venture capital and so-called “angel” investors into your business, there are drawbacks as well. Unfortunately, owners sometimes don’t think about these drawbacks until the ink has dried on a contract with a venture capitalist or angel investor – and it’s too late to back out of the deal.

Different Types of Financing

One problem with bringing in equity investors to help provide a working capital boost is that working capital and equity are really two different types of financing.

Working capital – or the money that is used to pay business expenses incurred during the time lag until cash from sales (or accounts receivable) is collected – is short-term in nature, so it should be financed via a short-term financing tool. Equity, however, should generally be used to finance rapid growth, business expansion, acquisitions or the purchase of long-term assets, which are defined as assets that are repaid over more than one 12-month business cycle.

But the biggest drawback to bringing equity investors into your business is a potential loss of control. When you sell equity (or shares) in your business to venture capitalists or angels, you are giving up a percentage of ownership in your business, and you may be doing so at an inopportune time. With this dilution of ownership most often comes a loss of control over some or all of the most important business decisions that must be made.

Sometimes, owners are enticed to sell equity by the fact that there is little (if any) out-of-pocket expense. Unlike debt financing, you don’t usually pay interest with equity financing. The equity investor gains its return via the ownership stake gained in your business. But the long-term “cost” of selling equity is always much higher than the short-term cost of debt, in terms of both actual cash cost as well as soft costs like the loss of control and stewardship of your company and the potential future value of the ownership shares that are sold.

Alternative Financing Solutions

But what if your business needs working capital and you don’t qualify for a bank loan or line of credit? Alternative financing solutions are often appropriate for injecting working capital into businesses in this situation. Three of the most common types of alternative financing used by such businesses are:

1. Full-Service Factoring - Businesses sell outstanding accounts receivable on an ongoing basis to a commercial finance (or factoring) company at a discount. The factoring company then manages the receivable until it is paid. Factoring is a well-established and accepted method of temporary alternative finance that is especially well-suited for rapidly growing companies and those with customer concentrations.

2. Accounts Receivable (A/R) Financing - A/R financing is an ideal solution for companies that are not yet bankable but have a stable financial condition and a more diverse customer base. Here, the business provides details on all accounts receivable and pledges those assets as collateral. The proceeds of those receivables are sent to a lockbox while the finance company calculates a borrowing base to determine the amount the company can borrow. When the borrower needs money, it makes an advance request and the finance company advances money using a percentage of the accounts receivable.

3. Asset-Based Lending (ABL) - This is a credit facility secured by all of a company’s assets, which may include A/R, equipment and inventory. Unlike with factoring, the business continues to manage and collect its own receivables and submits collateral reports on an ongoing basis to the finance company, which will review and periodically audit the reports.

In addition to providing working capital and enabling owners to maintain business control, alternative financing may provide other benefits as well:

  • It’s easy to determine the exact cost of financing and obtain an increase.
  • Professional collateral management can be included depending on the facility type and the lender.
  • Real-time, online interactive reporting is often available.
  • It may provide the business with access to more capital.
  • It’s flexible – financing ebbs and flows with the business’ needs.

It’s important to note that there are some circumstances in which equity is a viable and attractive financing solution. This is especially true in cases of business expansion and acquisition and new product launches – these are capital needs that are not generally well suited to debt financing. However, equity is not usually the appropriate financing solution to solve a working capital problem or help plug a cash-flow gap.

A Precious Commodity

Remember that business equity is a precious commodity that should only be considered under the right circumstances and at the right time. When equity financing is sought, ideally this should be done at a time when the company has good growth prospects and a significant cash need for this growth. Ideally, majority ownership (and thus, absolute control) should remain with the company founder(s).

Alternative financing solutions like factoring, A/R financing and ABL can provide the working capital boost many cash-strapped businesses that don’t qualify for bank financing need – without diluting ownership and possibly giving up business control at an inopportune time for the owner. If and when these companies become bankable later, it’s often an easy transition to a traditional bank line of credit. Your banker may be able to refer you to a commercial finance company that can offer the right type of alternative financing solution for your particular situation.

Taking the time to understand all the different financing options available to your business, and the pros and cons of each, is the best way to make sure you choose the best option for your business. The use of alternative financing can help your company grow without diluting your ownership. After all, it’s your business – shouldn’t you keep as much of it as possible?