FINANCING FOR

BUSINESS
ORGANIZATION
Why Business Need Financing
Starting a business
• Start-up capital is the finance needed by a new business to pay for
fixed assets and current assets before it can begin trading
• A business usually estimates the amount of start-up capital they need
in the business plan
• Many small new businesses will get a start-up loan to cover these
initial costs
Expanding a business
• As a business grows more finance may be needed for capital
expenditure
• It may require more equipment, buildings, IT infrastructure or vehicles
which will allow the business to increase output
• If a business wants to grow by developing a new product, it will need
to spend large amounts of capital on research and development
(R&D)
• E.g. Apple's annual research and development expenses for 2023 were
$29.915 Billion, a 13.96% increase from 2022, as they are investing heavily in
Artificial Intelligence (AI) and innovation of new products
Why Business Need Financing
Working capital
• Finance is required for working capital which is spending
on raw materials, wages or utilities
• Having a steady flow of working capital is essential to
keep the business operational
• Without working capital, the business would be unable to cover its
day to day expenses
• It may suffer cash-flow problems which could lead to business
failure
Which capital structure best aligns with your business goals?

Debt Financing Equity Financing

Owners retain full Dilutes the original

control and ownership owners' control and
of the business. future profits.
Maintains autonomy Shares decision-making power

Mandatory interest and No obligation to repay

principal payments the funds provided by
regardless of profit. investors.
Fixed financial liability Non-repayable capital

Failure to pay can lead Shares the business

to bankruptcy. risk with external
High insolvency risk investors.
Distributed financial burden
Interest payments are
often tax-deductible. Does not offer interest-
Reduces taxable income based tax deductions.
No tax shield benefit
Sources of Finance
• Finance can be classified into two sources:
1. Internal Finance
2. External Finance
• Internal sources of finance are funds generated within a
company from its own operations, such as retained
earnings, while external sources are funds obtained from
outside the company, such as loans, bonds, and equity.
Which financing strategy best aligns with your company's growth and cost objectives?

Internal Financing External Financing

It is the "cheapest" form of It involves obtaining funds

Cost of Capital
financing from outside entities
No interest costs or issuance fees Requires repayment or equity dilution

Relies on the company’s own Allows access to much larger

Capital
resources sums
Capacity
Limited by current profits and assets Essential for rapid business expansion

Retained earnings and idle Loans, public shares, and

Primary
asset sales trade credit
Sources
Generated from within the business Sourced from outside parties
Internal Source
• Retained Earnings:
• Profits kept in the business instead of being distributed as
dividends.
• Advantages: No interest or repayment; strengthens
financial stability.
• Disadvantages: Limited availability; may reduce dividends
to shareholders.
• Owner’s Capital (Equity):
• Funds invested by owners or shareholders.
• Advantages: Permanent capital; no obligation to repay.
• Disadvantages: Dilution of ownership if more shares are
issued.
External Sources
Source Description Key Advantages Key Disadvantages

Borrowed money from Flexible amounts; can

Interest cost; collateral
Bank Loans banks with interest be medium or long-
often required.
over a fixed term. term.

Long-term borrowing Obligation to pay

No loss of ownership;
Bonds/Debentures from investors with interest regardless of
predictable cost.
fixed interest. profit.

Selling ownership No repayment; raises Loss of control;

Equity Shares
shares to raise capital. large capital. dividend expectations.

Investment from private Ownership dilution;

Brings expertise and
Venture Capital firms in high-growth possible interference in
networking.
startups. decisions.

Short-term credit from Limited to short

Interest-free; supports
Trade Credit suppliers allowing periods; depends on
cash flow.
delayed payment. supplier trust.
Key Difference between Internal and
External financing sources
• Ownership: Internal sources of finance are owned by the
company itself, while external sources of finance come
from outside the company.
• Repayment: Internal sources of finance do not require
repayment, while external sources of finance usually
require repayment with interest.
• Cost: Internal sources of finance are often cheaper than
external sources of finance due to the absence of interest
charges.
• Availability: Internal sources of finance are always
available to a company, while external sources of finance
may not be available or may be subject to conditions.
Key Difference between Internal and
External financing sources
• Control: The use of internal sources of finance gives the
company more control over its finances, while external
sources of finance may be subject to conditions imposed
by the lender.
• Flexibility: Internal sources of finance are more flexible in
terms of use, while external sources of finance may have
specific restrictions on their use.
• Impact on ownership: The use of internal sources of
finance does not dilute the ownership of the company,
while the use of external sources of finance can dilute
ownership by issuing new shares or incurring debt.
Which financing duration aligns with your business objectives?

Short-Term Financing Long-Term Financing

Funds must be repaid Funds extend beyond one

within one year year, up to 20 years
Rapid turnover cycle Extended maturity period

Managing liquidity and the Funding capital

working capital cycle expenditure like
machinery or land
Operational cash flow maintenance
Strategic asset acquisition

Trade credit, bank

overdrafts, and Term loans, debentures,
commercial paper and equity shares
Short-dated debt obligations Permanent capital structures
Short term & Long term Capital
• A company must raise two kinds of capital, categorized by how
the funds will be used:
• Short-Term (Working) Capital
• Working capital refers to money spent on business operations
covering a period of a year or less.
It is used to:
• Purchase inventory
• Pay daily operating expenses such as:
• Wages and salaries
• Insurance premiums
• Rent
• Utilities
• Working capital ensures that the company can meet its short-
term obligations and maintain smooth day-to-day operations.
• 2. Long-Term (Fixed) Capital
• Fixed capital refers to money used to buy fixed assets,
which are long-lived and (with the exception of
land) manufactured items.
Examples include:
• Buildings
• Machinery
• Equipment
• Vehicles
• Fixed capital supports the company’s long-term growth
and production capacity.
Source of Short term capital/ Short
term financing
• Trade Credit
• Definition: Credit extended by suppliers allowing the
business to buy goods or services and pay for them later
(usually 30–90 days).
• Example: A supplier allows a retailer to pay for inventory
after 60 days.
• Advantages:
• Interest-free (if paid within the period).
• Easy to arrange if supplier trust exists.
• Disadvantages:
• May lose cash discounts for early payment.
• Overreliance can harm supplier relationships.
• Bank Overdraft
• Definition: A facility allowing a business to withdraw
more money from its bank account than it actually has, up
to an agreed limit.
• Example: A company with $10,000 balance may be
allowed to overdraw up to $15,000.
• Advantages:
• Flexible — interest charged only on the amount used.
• Quick access to funds.
• Disadvantages:
• Interest rates can be high.
• Banks may withdraw the facility at short notice
• Short-Term Bank Loans
• Definition: Borrowing from banks or financial institutions
for a short period (typically 3–12 months).
• Purpose: Cover temporary cash shortfalls or seasonal
expenses.
• Advantages:
• Reliable and predictable source of funds.
• Builds business credit history.
• Disadvantages:
• Requires collateral or good credit standing.
• Interest and fees increase costs.
• Commercial Paper
• Definition: An unsecured, short-term debt instrument
issued by large, financially strong corporations to raise
funds directly from investors.
• Typical Maturity: 30–270 days.
• Advantages:
• Lower interest rates than bank loans.
• Flexible and quick to issue for reputable firms.
• Disadvantages:
• Only available to large, creditworthy companies.
• Not suitable for small businesses.
• Promissory Notes / Bills of Exchange
• Definition: A written promise to pay a specified sum on a
specific date, often used in trade transactions.
• Advantages:
• Legally binding; helps manage trade credit.
• Can be discounted (sold) to banks for immediate cash.
• Disadvantages:
• Requires trustworthy parties.
• Non-payment risk if the drawee defaults.
• Customer (Advance) Payments
• Definition: Customers pay in advance for goods or
services before delivery.
• Example: Construction or event management businesses
often request deposits.
• Advantages:
• No interest or repayment obligation.
• Improves working capital.
• Disadvantages:
• Only possible when customers trust the firm.
• Not suitable for all industries.
• Accrued Expenses
• Definition: Expenses that are incurred but not yet paid
(e.g., wages, taxes, utilities).
• Example: Paying salaries at the end of the month for
work done throughout the month.
• Advantages:
• Interest-free temporary financing.
• Automatic and convenient.
• Disadvantages:
• Limited source; depends on timing of expenses.
• Non-payment can hurt employee morale or reputation.
Sources of Long term financing
• Equity finance: This equity finance or capital represents
the fund raised by a company using either IPO (initial
public offering) or a private investor. In both the public and
private routes, the ownership of the company is diluted.
However, the controlling power lies with the largest equity
holder. The equity holders receive a higher rate of return
compared to the debt holders as they face maximum risk
during repayment of their invested fund.
• Long-Term Loan from a Bank
• Many companies opt for a full-fledged long-term loan from
a bank that allows them to meet all their capital needs for
two, three, or more years.
• Debt Finance:
• Debt involves receiving a fixed amount of money now and
agreeing to repay it later. Long-term debt finance includes
bank loans, bonds, and convertible bonds.
• Bank Loans - Bank loans usually involve a fixed amount, fixed
period, interest, repayment schedule, and security.
• Bonds - Those operate like loans but are normally issued by
companies or governments rather than banks.
• Key features include:
• Fixed interest rate
• Fixed repayment date (e.g., a “2027 bond”)
• Fixed redemption value (known amount repaid at maturity)
• Marketability: Bonds can be bought and sold throughout their life.
• Redeemable: The issuer must repay the bond at maturity.
• Convertible Bond - A convertible bond gives the
bondholder the right to choose, at a specified time in the
future:
• To receive repayment in cash, or
• To convert the bond into ordinary shares in the issuing
company.
• Venture Capital (VC) Financing
• Startups or growing businesses looking for significant
capital may turn to venture capitalists. VC firms provide
funds in exchange for equity or ownership stakes in the
company. This is ideal for businesses with high growth
potential but limited access to traditional financing
sources.
• Crowdfunding
• Crowdfunding platforms allow businesses to raise funds
from a large number of small investors, usually through
online platforms. This option is popular for startups or
niche businesses that can generate interest from the
general public in exchange for rewards, equity, or other
incentives.
• Leasing
• Leasing allows businesses to acquire the use of
expensive assets, such as machinery, equipment, or
property, without needing to purchase them outright.
While not technically financing in the traditional sense, it
provides a way to access capital while preserving cash
flow.
Business Growth Cycle
Financing Sources Associated with
each stage
The Introduction Stage
This is the pre-revenue phase where the business is just an idea, a
prototype, or a basic business plan. The focus is on market research,
product development, and testing viability. Risk is at its absolute highest,
and there is no track record to prove future success.
• Associated Financing Sources
• Because institutional lenders (like banks) view this stage as too risky,
funding relies heavily on equity and personal networks.
• Bootstrapping (Personal Savings): The founders use their own
savings, credit cards, or home equity to fund initial operations.
• Friends and Family: Early capital injected by people who trust the
entrepreneur personally, often via simple equity or promissory notes.
• Grants: Government or academic grants designed to spur innovation
(e.g., small business R&D grants) which do not require giving up
equity.
• Crowdfunding: Platforms like Kickstarter or Indiegogo allow the public
to pre-order products, providing non-dilutive working capital.
The Launch Stage
The product or service is officially launched into the market. Revenue
begins to trickle in, but expenses heavily outpace income as the
business burns cash to acquire customers, market its brand, and
tweak the business model.
• Associated Financing Sources
• At this stage, funding is needed to achieve "product-market fit."
Investors look for early traction or a highly scalable model.
• Angel Investors: High-net-worth individuals who invest their
personal capital in exchange for equity, often providing mentorship
and industry connections.
• Venture Capital (Early-Stage/Series A): Institutional firms that
invest larger sums into high-growth startups. They look for massive
scalable potential and usually demand a seat on the board.
• Incubators and Accelerators: Programs that offer seed money,
office space, and intense mentorship in exchange for a small
percentage of equity.
The Growth & Expansion Stage
‘The business has established product-market fit, and revenues are growing
rapidly. The company is likely breaking even or beginning to turn a profit. The
primary challenge shifts from survival to scaling—penetrating new markets,
increasing production capacity, or hiring a larger team.
• Associated Financing Sources
• Because the risk profile has decreased and the company has hard assets,
accounts receivable, and predictable cash flow, debt financing becomes a
viable option alongside equity.
• Venture Capital (Growth Stage / Series B & C): Larger VC firms provide
substantial capital injections ($10M+) to aggressively capture market share or
fund acquisitions.
• Commercial Bank Loans & Lines of Credit: Traditional banks will now lend
to the business based on steady cash flows, inventory, or accounts receivable.
• Venture Debt: Specialized debt financing provided to VC-backed startups to
extend their runway between equity rounds without further diluting ownership.
• Asset-Based Lending: Securing loans against tangible assets like equipment,
machinery, or real estate to fund expansion.
The Maturity Stage
• Growth stabilizes into a predictable, steady upward trajectory or
levels off. The company is highly profitable, possesses a strong
market presence, and enjoys stable cash flows. The focus shifts
from rapid expansion to maintaining market share, improving
operational efficiency, and paying dividends.
• Associated Financing Sources
• With a proven track record and substantial assets, mature
companies have access to the cheapest and most diverse forms of
capital.
• Retained Earnings: The business generates enough internal cash
profit to fund its own ongoing projects, research, and development
without seeking outside capital.
• Traditional Bank Debt & Corporate Bonds: Large-scale debt
instruments with favorable interest rates, as the default risk is low.
• Private Equity (PE): Mature companies looking for an exit for
founders or a major restructuring may sell a controlling stake to
private equity firms.
The Decline Stage
• At the peak of maturity, a business faces a strategic
crossroads: finding new life through a massive liquidity
event or transitioning into a decline if it fails to innovate.
• Associated Financing Sources

• Initial Public Offering (IPO): The ultimate financing

milestone where a company sells shares to the public
stock market, raising massive amounts of capital while
allowing early investors and founders to cash out.
• Mergers & Acquisitions (M&A): The company is
acquired by a larger competitor or strategic partner,
providing a full exit for existing owners.