Obtaining Low-Cost Funding: Internal and External Alternatives

The role of a CFO (or indeed any finance professional) is complex and multifaceted, but if the role were to be boiled down to a two-word description, it would perhaps be this: finding funds.

Managing money is easy… when you have enough. But for any number of reasons, a CFO will regularly need to source funds. And where they come from will depend on the organisation and the situation it finds itself in.

Funding sources can be split into two groups: internal and external. Each source brings with it a wealth of considerations, including cost, availability, eligibility and legality, so choosing the right funding source isn’t simply about identifying the cheapest.

Let’s take a look at the internal and external funding sources that most organisations will have at their disposal, and which represent the best option for CFOs looking to put their company in the strongest financial position possible.

Internal funding sources

Retained profits: The reward for running a successful business, retained profits are the primary funding source for most businesses. This is your money: you don’t pay interest and you have total control, making it the perfect funding source. Generally speaking the only issue is one of availability. It’s rare for an organisation to boast enough retained profits to do everything they want to do, and so the search for funds may shift elsewhere.

Sales of assets: Liquidating assets, particularly those that are no longer used or otherwise obsolete, can help your organisation to free up all important funds. Depending on the size of the asset this source can represent either a short-term or long-term funding solution. The main drawback with sales of assets comes in times of acute financial need, when there’s a temptation to sell assets before the end of their useful life.

Working capital reduction: Managing working capital, and finding the optimal situation, is absolutely key to a CFO’s role. By lengthening the accounts payable cycle or hastening the accounts receivable cycle you can free up much needed cash, although these practices come with obvious risks to long-term financial health and organisational relationships.

External funding sources

Bank loans: The primary external funding source for most organisations, obtaining a company loan from a lender is the traditional route taken by CFOs. Regular interest will need to be paid on the loan amount, and if you fail to pay, the bank can claim the collateral you nominated in order to secure the loan.

Factoring: This is a financial transaction and a type of debtor finance in which a business sells its accounts receivable to a third party, usually at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. There are quite a few types of factoring, all in which represent a price and an alternative to bank and other means of financing available.

Bond issues: A popular funding source for small businesses in the US, an organisation can issue bonds for debt financing. These bonds are made available to private investors who act as the financiers, while a middleman organisation disburses the repayments amongst the investors.

Equity financing: A popular source of external funding for start-ups, particularly in innovative and high-growth areas like tech, finance provided by angel investors and venture capitalists is supplied in return for a slice of equity in the company. This is a high risk, high reward strategy for any business: you give up serious control and potentially huge future earnings, but in return you get the injection of cash, experience and expertise you might need to succeed.

To understand which funding source is best for your organisation, you must first gain a deep and current understanding of your financial situation, which can be particularly complicated for sprawling, multinational organisations that deal across borders and currencies.

Unless you use Certomo. There’s no better time that now to start working towards a better financial and funding future. Chat to the team today.

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