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Businesses that want to expand rapidly, or that find themselves in a situation where current financial resources are inadequate to cover required expenditures, will often need to raise financial capital. There are several sources from which a business entity can raise the required capital; however, doing so will usually require a methodical business plan. Potential sources for capital to help support business objectives or to keep a business afloat include shareholders, factoring, loans, grants, clearing banks and investors. Regardless of the source of potential financial capital the process is usually complex, and enlisting the help of a qualified accountant or finance attorney is often an important part of the process. Also, regardless of how bad the capital is needed, the business needs to act with prudence to ensure any deal offered is not detrimental to the viability of the company in both the near-term and long-term.
One of the most important sources of finance capital starts with shareholders, in particular if the business is having trouble financially or if the business has a solid plan for expansion. If shareholders have the required funds, this is an alternative. For large bailouts or to finance large expansions, however, companies usually have to consider outside alternatives. Additionally, if the shareholders do not have the funds available, external sources become the only option for the business.
When short-term financial capital is needed to meet payroll or other required expenditures, factoring is an option for a business to consider. Factoring is the process of raising capital from future invoices and customer debts that have yet to mature. The business will take out a loan from a lender who specializes in factoring finance using the debts and future invoices as security against the loan. These sources of capital, however, are usually best for creating better cash flow, rather than financing an expansion or handling a major financial crunch due to lack of revenues or profits. Another such option for creating cash flow is using a bank overdraft account — set up with the business’s bank — which gives the business a pre-determined overdraft limit to draw from.
Major sources of financial capital, however, come from grants, banks and investors. Available from governments, local authorities, development agencies and sometimes business associations, grants provide an important source of capital for new and existing business. Grants usually do not require repayment, but getting one is usually quite competitive and often goes to the business most likely to succeed.
Banks as well are an important source of financial capital and provide both long-term and short-term loans. Contingent upon a solid business plan, a thorough loan proposal, and a good credit rating, banks will usually provide loans for acquiring assets needed to expand a business. Often, the assets acquired are considered collateral on the associated loans.
Investors are usually the most important source of funding for a business, in particular for a start-up. Incorporation allows a company to sell shares to the public or privately to raise financial capital, while other types of businesses will need approach investors who will provide capital in return for a stake in the business. Having a solid business plan with a strong indication of success is crucial for swaying investors.