Sources of Funds
- for new businesses
- Solving Cash Flow problems
- by External methods!
Questions - Raising money
What sources of funds are
available to develop a new
There a several sources of
funding to consider when starting
a new business. Included in
these are the following:
Sources of Funds for
Personal Savings: primary source of
capital to start new businesses
Friends and relatives: no interest loans?
Banks and Finance Companies:
Most common source of funding,
if business is sound and meets lending
criteria. May require business plan.
Personal Credit Cards: a “last resort”
<-- high interest rates
Sources of Funds for new/
Venture Capital firms:
provide start-up and other needed money
for new/expanding companies in exchange
for equity or part ownership.
these are usually for larger enterprises.
Sources of Funds or Capital
In the real world,
businesses can use a wide range of other
sources of funds to help finance their
not all of them are in cash;
some take the form of assets that the
business can use.
these can be used to improve cash flow in
both the long and short term.
Main Sources of Funds
Below are the main sources of funds or
capital, available to operating businesses to
improve and manage their cash flow.
Owner's Capital Leasing
Shareholders' Hire Purchase
Capital Buying on Credit
Retained Profit Selling Assets
Bank Loan Factoring
Owner's Capital 1
Often, the only source of capital available
for the sole trader starting in business.
same often applies with partnerships,
but there are more people involved, so there
should be more capital available.
This type of capital, when invested is often
quickly turned into long term, fixed assets,
which cannot be readily converted into
Owner's Capital 2: cash flow
If there is a shortfall in Cash Flow, owners
of operating business could invest more
money in the business.
For many small businesses, however, the
owner may already have all their capital
invested, or they may not be willing to risk
So this may not be the most likely source of
funding to deal with cash flow problems.
Shareholders' Capital 1
Shareholders are the owners of a Limited
They invest money in the hope of capital
That is, the business makes profits, grows,
makes more profits
As the business becomes bigger, their
investment will be worth more, and
their dividend (the shareholders share of the
companies profits) will be worth more
Shareholders' Capital 2
It is quite normal for limited companies to
issue new shares (a Rights Issue),
in an attempt to raise capital,
but this is normally for investment,
expansion or restructuring,
not for solving a cash flow problem!
Shareholders' Capital 3:
Retained Profit 1
At the end of the trading year, a business
will work out its profit.
All of this profit can be taken by the
This would be the dividend in a limited
Alternatively, some or all of it could be
reinvested in the company,
to help the business grow and therefore
Shareholders' Capital 3:
Retained Profit 2
Retained profit is shown as reserves on a
Company Balance Sheet,
but it can take the form of any business
so it may not be in cash, or money in bank.
Shareholders' Capital 3: What
is Operating Profit (1)?
Profit is often a misunderstood term.
Profit is the surplus in money terms that a
firm has made after paying all the costs
associated with producing and selling
It should not be confused with sales
revenue which is the money the firm has
received from selling the product.
Shareholders' Capital 3: What
is Operating Profit (2)?
There are various types of profit measured by
accountants in the firm's profit & loss
Operating profit is the profit after both the direct
and indirect costs have been paid.
Sales revenue - Cost of goods sold = GROSS
Gross Profit - marketing and admin. costs
= OPERATING PROFIT
Operating profit is sometimes also known as
a form of loan from a bank.
business becomes overdrawn when it
withdraws more money out of a bank account
than there is in it,
this leaves a negative balance on the account.
It is often a cheap way of borrowing money
once an overdraft has been agreed with bank,
business can use as much as it needs up to the
agreed overdraft limit, at any time.
But bank will charge interest on the amount
will only allow an overdraft if they believe the
business is credit-worthy
i.e.: it is likely to pay the money back.
bank can demand repayment of an overdraft at
Many businesses have been forced to cease
trading because of the withdrawal of overdraft
facilities by their bank.
Even so, for short term borrowing, an
overdraft is often the ideal solution, and
many businesses often have a rolling (on-
going) overdraft agreement with the bank.
This is often the ideal solution for
overcoming short term cash flow problems,
for example: funding the purchase of raw
materials, whilst waiting for payment on
goods produced (which may or not be sold)
Bank Loan 1
lending by a bank to a business.
fixed amount is lent: e.g. £10,000
for a fixed period of time: e.g. 3 years.
bank will charge interest on this, and
the interest plus part of the „capital‟ (i.e., the
amount borrowed) will have to be paid back
bank will only lend if business is credit-
worthy, and bank may require security.
Bank Loan 2
if security is required, this means the loan is
secured against an asset of the borrower
for example, house/business asset of Sole Trader
if loan is not repaid, bank can take possession of
asset/house and sell it to get its money back!
loans normally made for capital investment
unlikely to be used to solve short-term cash flow
but, if loan obtained, frees up other capital held by
the business, which can be used for other purposes
business has use of an asset,
but pays a monthly fee for its use and will
never own it
For example, someone setting up business
as a Parcel Delivery Service (courier).
Could lease a van they need from a leasing
Will have to pay monthly leasing fee, say
£250 per month
This is very useful if they do not want to
spend £8,000 on buying a van.
Will free up capital which can be used for
Business purchasing equipment may decide
to lease if it wishes to improve its
immediate cash flow.
In example above, if van had been
purchased, flow of cash out of business
would have been £8,000
By leasing, flow out of business over first
year would be £3,000,
Possible £5,000 left for other assets and
investment in the business.
Leasing allows equipment to be updated
regularly, but it costs more in the long run.
Similar to leasing,
But, at end of hire period, asset belongs
to the company/etc. that hires it.
For example, farmer could Hire Purchase
Would own the tractor once they had paid
Buying on Credit 1
If a business, selling shoes, buys on credit from
Clark's Shoes/K-Shoes, it may not have to pay
Clark's for one month after delivery of goods.
It means business could sell the shoes at a
profit, and have money at the end of the month
to pay Clark's invoice.
Extending the credit period will help short
term cash flow. For example:
by delaying paying invoices for extra 14 days
Buying on Credit 2
will be more cash in bank for this period.
However, it may upset a business‟ suppliers,
who have their own cash flows to think of!
Next time the business wanted credit from
supplier, they may be turned down!
Slow payment by debtors is problem for many
the government has tried to take action against
this type of behaviour.
Business can sell its assets to raise capital!
Often last choice: assets are vital to business.
Business may lease-back asset so retain its use
However, often preserve only of big business.
For example, sale & leaseback of office blocks
Selling and leasing back improves short term
If cash raised used effectively, long term cash
flow and profitability can also increase.
If firm is in immediate need of cash, could
chase its debtors for repayment.
May result in „early repayment‟ discounts.
Chasing debtors for early repayment may
lead to long-term loss of trade.
Debtors may buy from another business
next time, but
Can be an effective method of solving
short-term cash flow problems.
For larger firms with turnover (sales) of
£100,000 or more per year,
Is possible to let Factor manage the
Factor is a type of finance company
Will pay 80% of invoice value at time of sale,
Will take responsibility for receiving
payment from debtor(s).
balance owed by debtor(s) will be passed on
There is a charge for factoring
Amount charged depends on such things as:
Number of debtors, Size of debts,
Past bad debt history.
But factoring improves business' cash flow.
It is popular amongst small to medium size
This proves many managers and owners
regard this service as good value for money
Any Questions ?
Powerpoint presentation prepared by M C Pratt, St Martin‟s College, from:
Cash Flow Learning Trail: Sources of Funds or Capital by biz/ed & Frequently Asked Questions by SCORE Pittsbu
Web pages: http://www.bized.ac.uk/stafsup/options/cashflow4d.htm
NOTE: Copyright of content in all slides is assumed to be retained by biz/ed and SCORE Pittsburgh,
The only exception to this is where amendments or improvements have been made in this presentation which are sufficient
for copyright of those amendments or improvements (only ) to then pass to M C Pratt.