Internal Finance
Internal Finance can be profit that has been retained, squeezed out of working capital, or can be cash from sale of assets. This is money that was already within the business.
External Finance
External Finance for day-to-day working capital is trade credit, bank overdrafts, and debt factoring. This is money from outside the firms own resources.
Retained Profit
Once the business starts to generate sales it will hopefully make some profit. This provides a return on the investment on the business. However it is also a source of finance. Research shows that over 60% of business investment comes from reinvested, retained profit.
Squeezing Working Capital
By cutting stocks, chasing up debtors or delaying payments to creditors, cash can be generated from a firm’s working capital. However, when cash is taken from working capital for a purpose such as buying fixed assets, the liquidity position worsens.
Sale of Assets
An established business has assets. These can be sold to raise cash. The business loses the asset but has the use of the cash. It makes good business sense for businesses to dispose of redundant assets. They can finance development without extra borrowing. If the asset is needed, it may be possible to sell it, but immediately lease it back. In this way, the business has use of the cash and the asset. This is known as the sale and leaseback.
External Finance
Overdraft
Overdrafts tend to be more flexible and do not carry the same various requirements of security of a loan. Overdrafts are more suited for day to day expenses incurred through running the business. It is not suitable for capital expenditure or to cover start-up costs for any length of time. When a business has problems with cash flow an overdraft would help to keep the cash flowing
Bank loan
The bank can not ask for full payment unless the loan conditions are breached and you are guaranteed that money for a certain period. Banks believe that this will make them more consistent lenders, when a business needs a sudden injection of cash a loan would be give them that. A loan could cost the business some money due to the interest paid to the bank.
Leasing
A lease is an agreement between the business and the “lessee”. The business will pay a periodic fee, usually monthly, for the use and possibly ownership of equipment. This will help the business as they don’t need to find a big sum of money to buy equipment suck as a computer, they can pay for it over a period of time.
Share Capital
Share Capital is raised through the sale of shares to individuals or institutions, who in return for their investment receive interest in the form of a dividend, which constitutes a share of the profits made by the business.
Venture Capital
A company is suitable for venture capital investment if it exhibits high growth prospects, has a product or service with a competitive edge or unique selling point and has a strong management team. To this the person will have to value the business, and will then have to look for investors.
Grants
All publicly funded schemes are designed to encourage new and growing businesses to bring wealth and ultimately create jobs. To help achieve this government make available a portion of the taxpayer’s money to help and encourage enterprise. This cash gets distributed through a variety of ministries, departments and agencies on a national and local, most businesses are eligible at any one time to apply for a number of different grants and support which in are distributed in a wide variety of forms.
Factoring
Factoring is a flexible form of loan, which advances money to a company as it issues new invoices. This is different to overdrafts or more formal loans, which are usually for a fixed amount.
