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As a business owner or CFO of a corporation, seeing a decrease in the company’s cash flow can be a very unpleasant feeling. The statement of cash flow provides businesses with information on how much actual cash the company is generating. With a lack of revenue or an increase in cash outflows, cash flow will decrease, forcing a company to seek alternative means of funding. An outflow consists of paying employees, paying for supplies, paying creditors, investing in long term assets, and much more. The following discussion will examine alternative ways a company can fund operations and increase cash flow.

Simply explained, a company can increase cash flow or fund new projects in 3 major ways: debt, equity, or both. The most common form of funding a business adventure is with debt. Debt funding can come from bank or credit union in the form of unsecured loans, personal lines of credit, or company collateral base credit (Åstebro, 2003). The business owner can seek out personal loans from an individual’s IRA accounts, credit cards, or collateral based loans like home equity lines of credit. Finally, a company can seek cash flow from issuing debt securities to investors in the form of bonds. Depending on the reputation of the company, they may have a hard time raising capital with bonds because they will be forced to pay investors higher than market interest rates based on a lower than BBB rating.

When a company raises capital by equity, they perform an initial public offering where investors would purchase ownership of the company in the form of stock, either preferred shares or common shares (Amin, 2012). Investors would be taking a risk by investing in the company because unlike bonds, company stock does not have a rate of interest and the profit from the stock purchase comes in the form of dividends or capital appreciation.

Whether a company chooses to fund cash flow in the form of debt or equity, they are required to make the individual on the other side of the transaction happy. Lenders require a company to provide financial statements to prove their capability of repaying the loans. Investors who purchase bonds from a company expect to receive the promised coupon rate of the bond. Finally financing a business with one’s own personal cash like a 401k or IRA can possibly result in personal bankruptcy if a business does not produce at the capacity needed to repay loans.

So, which option is the best? It depends on the company. Depending on the size of the company, an initial public offering or bond sale may be the best option. However, for small or startup companies, it may be best to seek a loan from a bank. If a CFO works for a larger company, the best form of funding should come with diversification. When investing, an investor should never put all money in one investment because the risk is much higher, so investors diversify to lower risk. The same should be done when funding a business.

The best way to fund a business’s cash flow is with diversification in debt and equity. Diversification should also come in the form of different terms. For example, a company could take bank loan with a 10-year payback period, they could issue bonds with interest only payment for a longer term, and they could issue a public offering of company stock that has no required payment unless the board of directors approves a dividend payout after the company is performing well. This kind of diversification will ensure a company does not get overwhelmed with the repayment process of a single major loan. Again, there is no perfect answer to funding a company, however if done with diversification, a company is more likely to increase cash flow while waiting for revenue.