Internal and External Sources of Business Capital

June 8, 2010 by Frank Goley, Business Consultant

Understanding what sources of business capital are available to you will help tremendously in your business finance strategy and quest. I will explore both internal and external sources of more traditional, yet assessable, business capital in this blog post. In subsequent blog posts I will discuss venture capital, private investment and alternative forms of business finance.

1.     Overview: The Different Types and Sources of Business Capital Available

a.     Founders’, Principals’, Management Cash

b.    Business Associates

c.     Family

d.    Individual Investors

e.     Venture Capital

f.     Investment Banks

g.    Banks & Credit Unions

h.     Business Finance Companies

i.      Lease Finance Companies

j.      Suppliers/ Customers/ Industry Lenders

k.     Joint Ventures & Strategic Partnerships

l.      Commercial Loan Brokers

m.   Professional Legal & Accounting Intermediaries

n.     Government Grants, Loans & Guarantees

2.     Internal Sources of Business Capital

a.     Cash Flows

b.    Accelerating Receivables Collections

c.     Changing Collection Terms

d.    Disposing of Surplus Inventory

e.     Retained Earnings

f.     Cost Cutting & Cost Saving Strategies

g.    Change Accounts Payable Terms

h.     Asset Management:  Disposing of old or poor performing Assets

i.      Cost Control Mechanisms

j.      Budgeting Process

k.     Productivity Measures

l.      Personal Investments of Company Principals

3.     External Sources of Business Capital and Finance

a.     Suppliers and Customers Trade Credit Strategies                     

i.        Extension to Invoice Pay Dates                    

ii.        Cash Discounts for Early Payment                   

iii.        Make Payment on last day due if no Cash Discount is allowed                   

 iv.        Extend Payment Terms:  i.e.  30 days after the end of the month verses 30 days from receipt, buying you an average of 15 days.                    

v.        Need a Capital increase in 60-90 days to meet demand.                   

vi.        Reduce Delinquency Late Fees                  

vii.        Issuing a Note (promise to pay) for a shipment, with a prescribed later date payment plan.  Readily available and fast.  Less red-tape.  Use for limited time frames.  Don’t hurt Supplier & Customer relationships.

b.    Debt Capital Overview                     

i.        Term:  30-60-90-120 Day Term1-5-10-15 Year Term                    

ii.        Bank Line of Credit:  Secured & Unsecured                   

iii.        Real Estate Loans                   

iv.        Equipment/ Machinery Purchase                    

v.        Inventory Finance                    

vi.        Accounts Receivables Factoring/ Assignments

c.     Bank / Commercial Lender Finance                     

i.        Local Banks/ Community Banks                    

ii.        Credit Unions:  often much more personal than Banks                   

iii.        Bank Finance can be slow                   

 iv.        A Loan Package is critical to successful, timely Bank Finance.                    

 v.        Develop strong relationships with Bankers.  If your Banker can’t help your Company with a Finance need, he or she knows who can.                   

vi.        Deal with at Least the Vice President level at the Bank or Credit Union.                  

vii.        Use local / Community Banks for Regional needs and Large Banks for National & International needs.                 

viii.        Understand the Bank’s lending process so you can facilitate your loan’s progress.                   

 ix.        Network with Bank Presidents at Chamber of Commerce and Industry Events                    

x.        Consider Syndication for large deal.  Hire Syndication Group.                   

xi.        Banking is a lot about Trust & Track Record.                  

xii.        Network with Attorneys & Accountants to find the right Banker for your Company’s needs.                 

xiii.        Use Trade Associations for strong Banking referrals.                

 xiv.        Find Banks that use SBA Guarantees to reduce risk and leverage Loan to Value & Loan to Cost.                 

xv.        Don’t go with the cheapest terms; go with the right Banking relationship and financial products for your Business.  The Long-Term payoff is much better.                

xvi.        Look for Long-Term relationships.  Make your Banker an integral part of your business.  Invite and include your Banker at Company Events and Announcements.  Send your Banker Business updates on a consistent basis.  Include your Banker when giving Suppliers and Customers Company tours.                

xvii.        Work with Banks that can customize terms for your Commercial Loan Requirements.

Resource: To understand how to use the Zeta Scoring System to your advantage please see my Business Plan Book for a detailed explanation and related formulas on the Bank Zeta Scoring System.

Posted in Business Finance.

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