Financing Growth and PLC Ownership

Why growth needs finance

An expanding business usually needs money before its expansion produces extra revenue. Opening more branches might require premises, equipment and additional staff. Producing more goods may also mean paying for extra materials before customers pay for the finished products. Finance therefore supports both investment in long-term assets and the day-to-day activity needed to grow.

An established business can use internal finance, generated from resources already within the business, or external finance, obtained from lenders or investors outside it. The choice affects more than how much money is available: it can change costs, cash flow and who controls the business.

Retained profit: reinvesting past success

Retained profit is profit kept in the business rather than distributed to its owners. For a company, this means profit retained instead of being paid to shareholders as dividends. It can help finance new equipment, extra staff or expansion into another market.

This avoids borrowing, so there is no loan interest or scheduled repayment. It also avoids bringing in new shareholders, allowing existing owners to retain their control. A profitable, established business may therefore use retained profit to fund gradual expansion.

However, the amount available depends on past performance and how much profit has already been retained. A business with low profits may not have enough to fund a major expansion. There is also an opportunity cost: money used for one growth project cannot be used for another purpose. Shareholders may prefer higher dividends now rather than waiting for possible future benefits from reinvestment.

Profit is not the same as cash available to spend. Some funds may already be tied up in assets or needed for everyday operations, so the business must consider its cash position before committing to growth.

Selling assets: releasing money from existing resources

A business can raise finance by selling assets it no longer needs, such as unused machinery, vehicles, land or buildings. For example, selling an unused warehouse could release cash to help equip a new branch.

This does not create loan repayments or introduce new owners. It can be particularly suitable when the business has valuable surplus assets that contribute little to its current operations.

The limitation is that there are only so many assets available to sell, and finding a buyer can take time. Selling equipment still needed for production could reduce output and damage the very growth the business is trying to achieve.

A sale and leaseback allows a business to sell an asset, such as its premises, and then rent it from the new owner. This releases cash while allowing continued use, but creates ongoing rental payments. The immediate cash benefit must therefore be weighed against future costs.

Loan capital: finance without sharing ownership

Loan capital is money borrowed from a lender, such as a bank, and repaid over an agreed period with interest. It can provide a substantial sum for expansion without changing ownership of the business.

An established business may find borrowing easier because it can demonstrate a record of successful trading. A lender will still consider whether the business is likely to make its repayments. The lender may require collateral, such as business property, which is at risk if the business fails to repay.

The advantage is that the owners can keep control while obtaining finance sooner than they could by accumulating more retained profit. Agreed repayment arrangements also help the business plan its cash outflows.

The disadvantage is the repayment commitment. Interest adds to costs, and repayments reduce available cash even if the expansion produces disappointing sales. A business with reliable cash flow may be better placed to take on a loan than one whose income is uncertain.

Share capital: raising finance by sharing ownership

Share capital is finance raised when a limited company issues shares to investors. Each share represents part-ownership of the company. Unlike a loan, this finance does not have to be repaid on a fixed schedule and does not carry loan interest.

However, investors become shareholders. They may receive dividends when profits are distributed and usually have voting rights that influence the appointment of directors. Issuing additional shares can reduce existing shareholders’ percentage ownership and influence unless they buy enough additional shares to maintain their proportion.

The trade-off is therefore different from borrowing: share capital avoids debt repayments, but the existing owners may have to share control and future profits with more investors.

PLC ownership and stock market flotation

A public limited company (PLC) can offer shares to the public, and its shareholders have limited liability. Their financial risk is limited to their investment rather than extending to personal responsibility for company debts. This protects shareholders, but does not remove the business risks faced by the company itself.

A growing private limited company may become a PLC to reach a much wider group of potential investors. Stock market flotation is the process of offering shares to investors and listing them on a stock market for the first time. Selling newly issued shares can raise substantial finance for expansion.

Once listed, investors can buy and sell shares through the stock market. These later transactions between investors change who owns the shares; they do not themselves provide new money to the company. The company raises additional share capital by issuing new shares.

Is becoming a PLC suitable?

PLC ownership can support large-scale growth because public share sales give access to a wider pool of investment. A higher public profile may also help attract customers, suppliers and future investors. Shares that can be traded more easily may be more attractive to investors.

There are important disadvantages. Flotation involves legal, accounting and other preparation costs. Public reporting and regulatory requirements take time and money, while published accounts allow competitors to examine the company’s financial performance.

Founders may lose influence as ownership becomes more widely spread. Shareholders can also put pressure on managers to deliver profits and dividends, potentially reducing the funds available for long-term investment. Publicly traded shares create a takeover risk if another business acquires enough shares to gain control.

Becoming a PLC is therefore not automatically the best next step for every growing business. It is more suitable when the scale of expansion requires substantial finance and the owners are willing to accept the costs and changes in control. A smaller expansion might instead be funded through retained profit, surplus asset sales or a manageable loan. Businesses can also combine sources rather than relying on just one.

Internal finance

Sale and leaseback: releases cash while retaining use of an asset, but creates rental payments.

External finance

PLC ownership

• Can offer shares to the public; shareholders have limited liability.
• Flotation: first listing and offering of shares on a stock market.
• Benefits: access to substantial capital and a higher public profile.
• Drawbacks: flotation costs, regulation, public accounts, shareholder pressure, reduced control and takeover risk.
• New share issues raise company finance; trading existing shares between investors does not.

Choosing finance

Judge suitability using the amount needed, available profit and assets, repayment capacity, costs and control. Large expansion may favour public share capital; smaller projects may suit internal finance or borrowing.