What Are The Sources Of Business Cash?

For any business there are essentially two sources of finance: money generated within the business itself, and money introduced into the business from outside.

How a business can be run so as to generate the maximum amounts of cash internally and use this as efficiently as possible (bootstrapping) has already been largely covered in the previous chapters where it can be seen that this is a matter of the following.

• Squeezing money out of working capital (or to look at it another way, making whatever cash you do have go as far as possible in funding trading) by actively managing both to: minimise the investment in current assets (stock and debtors); andmaximise the finance available from its normal sources of trade credit
• where a technique such as consignment stocking in effect helps both sides of the equation.
• Retaining as much as possible of the profits from trading in the business, which is a matter of restricting the dividends paid out to shareholders (dividend policy) or cash drawn by the partners or owner.

 

The range of sources of external finance will be covered in detail in section B and divides into three broad categories.

Debt

• This is money that has been lent to a business by a creditor. Debt can be:
• Institutional, by which I mean formal lending by a financial institution set up to advance funds as a business such as banks, building societies, venture capital firms (in respect of some parts of their investments) and a range of businesses known as Asset Based Lenders (ABLs). These institutions offer a range of financing services such as overdrafts, mortgages, leasing, hire purchase, sale and leaseback, trade finance, factoring and invoice discounting.
• Non-institutional, by which I mean both: loans in the normal sense such as directors’ loans into the business;credit provided normally in relation to a transaction or series of transactions by a third party, which is the equivalent to a loan. Examples of these would include trade credit, sums due to the Crown by way of VAT or PAYE/NI and vendor finance where the seller of a business allows the buyer time to pay for some or all of the purchase price over a period of time.

Grants

Grants are defined by the DTI as a ‘sum of money given to individual or business for a specific project or purpose’, where as long as you keep to any conditions attached to the grant you will not have to repay it as you would with a loan, nor will you have to give up any shares in your business, as you would with an equity investor.

Within grants I would include soft loans which are loans (a form of debt) but on favourable or discounted terms.

Equity

Equity is money or other assets put into a business by investors in return for their share of the profits of the business after the creditors have been paid.

At its simplest this is the personal capital put into or retained in a business by its proprietor or partners or the investment in shares and retained earnings by its shareholders.

However, it can become more complex: for example, where a business has acquired an investment from a third party such as another individual investor like a business angel, or an institution such as a venture capitalist, or from the public and/or institutions by way of a listing on a stock exchange. These situations may lead to different classes of shares being issued with differing rights to:

• control the company’s affairs by voting;
• receive payments where some shares may be preference shares which have a fixed rate of dividend (akin to a rate of interest on debt) and have to be paid in priority to the ordinary shares; and even;
• convert into other types of shares or be repaid under certain conditions.