5.2.1: Internal & Short-Term Finance
The Bootstrapper's Survival Guide
Strategic Context: When cash flow is tight and time is critical, businesses must choose between internal sources (retained earnings, asset sales) and short-term external finance (overdrafts, trade credit, factoring). The critical trade-off: internal is cheaper but limited; external is available but expensive.
The Finance Strategy Matrix
Internal Sources
1. Retained Earnings
Profit kept back in the business instead of paying dividends.
2. Sale of Assets
Selling unused machinery, vehicles, or property.
3. Working Capital Reduction
Reducing stock levels or collecting debts faster to free up cash.
Short-Term External
1. Bank Overdraft
Going into negative balance with the bank's permission.
2. Trade Credit
Delaying payment to suppliers (e.g., paying in 60 days instead of 30).
3. Debt Factoring
Selling unpaid invoices to a bank for ~90% cash immediately.
The Strategic Trade-Off
Internal finance is always cheaper (zero interest cost) but severely limited in amount. External short-term finance is readily available but expensive. The critical business decision: Can we survive using only internal sources, or must we pay the premium for external finance to preserve operations?
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