Internal Sources of Business Capital
For most businesses, Debt and equity financing are the main sources of capital. Both are external to the business itself. The money comes from banks or bond issues, equity participation of investors or venture capital funds, debenture notes and other less universal, but important sources of capital in specific businesses -- such as trade credit and factoring -- the sale of outstanding accounts receivable to specialized lenders or "factors" -- which is a prevalent practice in the fashion trades.
There are other sources of capital that are internal to the business; most are generated from internal operations. These include...
Owner's Investment (Startup or Additional Capital)
Beginning with adequate capital is imperative for all businesses. Approximately 8 out of 10 businesses fail in the first 18 months of operation. One of the most important reasons for failure is that the business began without sufficient capital to continue operating until it reached profitability.
A better source of capital for a company than debt or equity is a positive operating income from quarter to quarter. Why? Because the company is generating that positive operating income from its own successful business operations. Operating income is also known as earnings before interest and taxes or EBIT. Operating income or EBIT is commonly used to determine the overall success of the business.
Sale of Stock
Although not an option for most startups, voluntary investment through stock purchases in an ongoing business on the basis of its attractive financial profile is close to the heart of capitalism. Other than a large infusion of venture capital, stock offerings are the fastest way for a successful business to scale up.
Sale of Fixed Assets
The sale of a firm's assets is most profitable for a mature firm. A firm, for example, can sell older assets that have been replaced by others or that are no longer needed for operations. If these assets have been fully depreciated and have little or no book value, you will have a taxable gain from the sale. Nevertheless, such sales can add to your bottom line. In other instances -- and increasingly so in the largest coastal cities -- the rapid appreciation of real estate assets has meant that a business -- a restaurant, for example -- may hold real estate assets that far exceed the value of the business as an ongoing operation.
In these instances, the business can multiply its capital simply by selling the business and the underlying real estate in its present high-value real estate location and relocating in an area that has not yet benefited from the real estate boom.
Sometimes businesses, and smaller businesses particularly allow customers to let their agreed-upon payments slide. This is certainly a bad business practice on a number of grounds, and the appropriate remedy is to put more effort into collections. Doing so also increases available capital.
When you think about sources of money or capital for your business, think about both internal and external sources of capital as well as available alternative or non-traditional sources of business financing.