The Rise of Telecommunications Services in the Developing World

Telecommunications services have become a ubiquitous presence in our modern times, with cell phones and computers as our main tools for communication. In the United States, Europe, and other developed nations, we seem to take for granted the access we have to these devices and the ease at which we can acquire them. For third world and developing nations, the availability of these services lags behind, which has a palpable effect on their economies and quality of life. Research, however, has indicated that these nations are catching up.Consider that in 2005, about 2 billion people had a mobile or cellular subscription service. At the end of 2014, 7 billion people had some type of subscription, with 3.6 billion in the Asia/Pacific region alone. In terms of percentages, that is about 96 percent of the world’s population.When viewed through the lens of developed versus developing nations, research indicates that there are 128 subscriptions per 100 people in developed nations, versus 89 per 100 people in developing countries. While there remains room for expansion in developing nations, the rate of subscription growth has reached its lowest levels in a decade, meaning the market is approaching a saturation point.Telecommunications services also include access to the Internet, which has a much smaller reach when juxtaposed with cellular services. Three billion people are online, which represents about 40 percent of the world’s population. For developed nations, 78 per 100 people use the Internet, versus 32 per 100 people in developing nations. This is a much bigger gap than the one seen in cell phone usage, indicating these nations still have a long way to go. Of the 1.1 billion households not connected to the Internet, 90 percent are in developing countries.How can these nations catch up? Luckily, due to the expansion of telecommunications services and companies, broadband prices have dropped significantly over the past decade. In obvious economic terms, the cheaper the product, the wider the accessibility. Africa is notably the farthest behind in terms of broadband connectivity, with the continent accounting for 0.5 percent of the world’s fixed broadband subscriptions.Telecommunications companies are beginning to enter Africa, as many of its nations are emerging economic markets. With investment from the telecommunications industry, it is more than probable that access to the Internet will gradually climb similarly to that of the cellular market. While it is unlikely that these countries will reach the connectivity of the developed world, the level of infrastructure for communications will improve drastically with outside investments pouring in. Consider the case of Nigeria: about a decade ago, there were 100,000 phone lines, mostly landlines operated by the state-run company NITEL. That company folded, and now there are over 100 million mobile phone lines.In a world where quick, easy, and mobile communication is the norm, it is important to these nations to reach modern levels of telecommunications. It is hugely significant for their economies and also for simple access to information. The Internet and cellular phones have condensed the size of the world, allowing us the ability to communicate with anyone at any time.

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?

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