Finance and Growth

Sources of finance to promote growth are current earnings, the proceeds from the sale of assets not required for present operation, and outside or ‘external’ moneys raised from shareholders, private individuals and institutions. These sources are strongly influenced by the legal status of companies, their size, past record, gearing and future prospects. For example, non-quoted companies may not offer their shares for sale to the general public. Therefore external sources of finance tend to be rather restricted. Placings may be arranged through brokers for shares, but such companies may not use the more usual procedures of public issues or offers for sale. (1) By and large, of course, non-quoted companies tend to be small, and so do not usually require sums sufficiently large to warrant the use of normal Stock Exchange mechanisms. However, as the number of shareholders is restricted by law to not less than two and not more than fifty, issues to members of the companies may provide a very limited source of external capital. Coming away from the special problems of the non-quoted companies, all concerns are competing for capital and thus have to justify their use of it. Without a good past record of profitability, all forms of capital will be severely limited. Retentions of profit will not yield large sums, and shareholders will be unwilling to lend liberally on the basis of a poor rate of return in the past. Absolute size is also important. Large companies will have more assets to offer as security for loans, and their very size is some indication of commercial success in the past.