Financial Resources in Business

If revenue falls short of meeting a company’s cash flow needs, the company’s managers need to look elsewhere for money. Obtaining money for running a business can consume a lot of time and energy because it usually requires convincing someone with money that the business is worthy of a loan or an equity investment. Fortunately, business owners have several sources from which to choose.

Loans
Banks exist because people with financial sense decided they were capable of lending money at high enough interest rates to earn a profit over the cost of borrowing that money. They therefore are looking for businesses in need of loans. However, they will lose money if a business fails and defaults on its loans. So banks want confidence that a borrower will pay them back, and if a business has good credit and a strong operational history, a bank will likely provide a loan to help the company’s financing needs.

Factoring
As with a bank, people with financial sense formed factoring companies with the intent of profiting by meeting the financial needs of cash-constrained businesses. However, they generally look to solve shorter-term solutions. They lend money against invoices serving as collateral, or they buy the invoices. This turns accounts receivables or invoices into cash, solving the financial needs of the business while moving the risk of its customers’ payment defaults to the factoring company. The factoring company will, of course, charge the business for the advancement of the money, the transaction overhead, and the assumption of the payment default risk.

Corporate Bonds
Corporate bonds, or corporate notes, act like small loans that a bank would make, except that the bonds are traded on public markets just like stocks. Also, bond purchasers cannot negotiate the terms of the bond. They just buy it under its offered terms of duration and yield, and then they sell it or hold it to maturity.

Stock Shares
Having shares of stock, or ownership (also called equity) in the company, serves multiple purposes. It allows investors to pay for a portion of ownership and speculate that the value of that ownership will increase as the company grows. It also serves as a costless financial resource to the company in terms of money. The company pays nothing but listing or transaction fees as part of selling its stock. However, its original owners give up something important–a percentage of ownership and future profit. Also, depending how voting rights are divided, sale of stock can dilute control of a company or at least dilute control of how it votes for its board of directors that run it