Matching the source to the purpose and the time period

1. The finance should last as long as the need it is paying for, so the first question is always what the money is for and how long it will be tied up.
2. A short-term cash gap of a few weeks, such as paying £9,000 of wages before a big customer settles up, is best met by an overdraft or by trade credit.
   1. Both let the business borrow only for the days it is short, so the charge stops as soon as the money arrives.
3. A long-term asset needs long-term finance, so a £40,000 lorry that will run for eight years is matched with a bank loan.
   1. Premises costing £300,000 are matched with a mortgage repaid over 25 years, because the building and the borrowing both last for decades.
4. Permanent expansion with no repayment date attached is matched with retained profit or a new share issue, which is why a plc opening 40 stores raises share capital rather than taking an overdraft.

Weighing cost, control and risk

1. Cost: retained profit and a government grant cost nothing to service, a bank loan or mortgage charges interest at an agreed rate, and an overdraft is the dearest way to borrow for any length of time.
   1. A share issue charges no interest at all, but it commits the company to paying dividends for as long as those shares exist.
2. Control: borrowing leaves ownership untouched, because a bank has no vote on how the business is run.
   1. Selling shares or bringing in an outside investor raises money without repayments, but the newcomers gain a say in decisions and a permanent slice of future profit.
3. Risk: loans and mortgages usually require security, so a missed run of repayments can cost the business its premises or its equipment.
   1. A firm already carrying heavy repayments should think hard before adding more, because fixed outflows have to be met in bad months as well as good ones.

Sources suited to a new business

1. A start-up has no retained profit, no spare assets to sell and no trading record, so most of the internal menu is closed to it and lenders treat it as high risk.
2. That leaves four realistic options: the owner's savings, money from family and friends, a government grant, or a loan the owner backs with security such as their own house.
   1. Owner's savings and family money: these need no credit history and cost no interest, but the sums are small and the owner's personal finances are on the line if the business fails.
   2. A government grant: it never has to be repaid, which is why a start-up chases one, but it is competitive and carries conditions on how the money is spent.
3. Two external sources stay out of reach until the business has a record to show.
   1. Trade credit: suppliers rarely offer it to a firm with no payment history, so a new business often has to pay for its first deliveries in cash, which makes the early months harder.
   2. A share issue: a new business cannot sell shares to the public, because that requires plc status, and even a small private company will struggle to find buyers with no accounts to show them.

Sources suited to an established business

1. An established firm can show several years of accounts and offer real assets as security, so it is offered more sources, larger sums and lower interest rates than a start-up.
2. Retained profit: this is usually the first choice, because it is free, immediate and costs no control, which is how Warburtons funds most new bakery equipment.
3. Selling unwanted assets: this is only open to a business that has accumulated them, so an older firm with an unused warehouse can raise cash a start-up simply does not have.
4. A new share issue: for sums beyond what profit can supply, an established limited company can issue new shares, which is the only realistic route to several million pounds with no repayment date attached.
5. Being established is not a blank cheque, because a firm whose profits are already swallowed by existing loan repayments will be refused further borrowing however long it has traded.

Reaching a decision for a given situation

1. Start from the amount required, because it rules options out on its own: £800 for a repair can come from retained profit, while £2 million for a new factory cannot.
2. Check the legal structure next, since a sole trader or partnership cannot issue shares at all, so recommending one is a wasted answer.
3. Then ask whether this business could survive the fixed repayments in a bad month.
   1. A firm with unstable sales is safer with finance that flexes, such as an overdraft, while a firm with steady sales can carry a loan comfortably.
4. Finish by choosing one source and explaining why its drawback is acceptable for this business, rather than listing good and bad points and leaving the decision open.