There are various means of raising capital and the corporate finance team will be well aware of all these methods. It will also be aware of the risks involved in raising capital from external sources, let alone the relative loss of control of the firm’s business that is often a result of the acquisition of external funds. In this article I will be looking specifically at how funding can be received from within the company’s own internal networks.
The first method is that of a merger and acquisition. This can be a one way arrangement or a reciprocal arrangement. Obviously there will be some dynamic changes in terms of the power structure which could lead to the settling into a pattern of the weaker and stronger partner. This methods allows the two companies to join resources and logic would dictate that a dual resource structure would have greater weight than a single resource structure.
The reality however is that the merger brings with it problems of compatibility and issues of staff relationships. The process of resolving these issues might end up costing far more than the original merger income as envisaged.
The company can also look at inventory financing as a possible internal capital source. The corporate finance team will assess which inventory is suitable and which is not. The lenders who agree to this form of financing will use the inventory as collateral. Generally they have higher loan costs than banks so entrepreneurs need to be weary of over committing. It is also possible that the orders may not materialize such that the inventory becomes in effect a dead asset whose residual profits have to be turned back to the lender.
Alternatively the company can consider factoring and initial public offering as means of accessing funds. Factoring involves borrowing against the accounts receivable. It is risky because those receivables may not materialize yet there is a loan to be paid. In addition the company must be in pretty good health before the investors can consider lending them under such risky conditions. The initial public offering mechanism (IPO) is a form of issuing shares. It too has its own risks because the people might not want to buy your shares if they suspect that the company is in trouble anyway.
The final option is the management buyout. This is where a group of executives come together to purchase the controlling stocks and shares in the company. It usually happens when the organization is facing financial ruin unless there is some form of intervention. It can also be a method of keeping the venture capitalists at bay.
The advantages include the retention of some control by management and they are less likely to lead to repressive redundancies. Given the risks being taken and the fact that this comes when the organization is in dire straits, the reality is that the prices that the company is sold for are below the market price. The business world is littered with horror stories of executives who bought company assets for a song and then proceeded to make extravagant profits.