Sources of Finance

Credit from suppliers - this is, in effect, borrowing from your suppliers and can take many forms. The most basic - extended payment terms - simply involves negotiating a set period of time before you have to pay suppliers. That will obviously allow you to keep hold of your cash for longer and to use it elsewhere. If you are a large or long-standing customer of a particular supplier, you may be able to negotiate such better terms, particularly if you have been a good payer over the years!

Bank overdrafts - this is part of what is called "Debt finance”. These are a flexible way to cover short-term, day-to-day business requirements - for example, if an obligation on you to pay for raw materials arises before you receive the money from the people you have sold the finished goods on to. If your account remains overdrawn for a long period of time so that you have a continuous level of core borrowing, an overdraft is probably not your best finance option as you could end up paying a lot of interest.

Loans - These too are part of what is called "Debt Finance”. Loans are the traditional source of finance for small businesses and are usually used to finance the buying of assets and to meet other longer-term capital needs. With loans, you know how much you have to pay back each month, and for how long. You may be able to negotiate better repayment terms and interest rates. Businesses are also often able to call on loans from friends and family - if family and friends do lend you money, you will need to set out a formal agreement on paper so that everyone knows where they stand. Some people will be willing to extend their money to your company but will want equity in your business in return - see below.

Factoring - as and when you raise invoices to your customers, you may be able to sell those debts to a factoring or invoice discounting company who pay you a percentage of their value straight away, so you have "cash in hand”. They then collect payment from your customers and make a margin. So, factoring releases cash to boost your cashflow, using your outstanding invoices as security. As soon as you raise an invoice, the factor releases up to 90 per cent of its value to you, before your customer pays. When the invoice is paid, the factor pays you the balance, minus their margin or a charge.

Selling equity in your company to third parties - one way to raise extra capital is to sell shares in your company - for example to your workers, family, friends, the public, or professional investors. They become partial owners of the company. The rights any of these people then have in your company depend on the types of shares they buy, on any agreements made between shareholders,  and the proportion of the capital sold and the percentage they own.