Which type of corporate financing is best for your business?

What is corporate financing?

Determining your financing requirements

• Working capital financing: how much is required to cover production costs?
• Growth financing: how much is needed to increase production and open up into new markets?
• Financing investments:which necessary investments will expand your business?

Prerequisites for successful corporate financing

• What stage is your business in?
• How much of your own money can you invest in your company?
• Is money from the company available to you for financing?
• Do you need outside capital?
• Will it be beneficial to bring in a partner to join your venture?
• What is the ideal ratio of debt and equity capital to business model and current company phase?

What types of corporate financing are there?

• Self-financing: in this case, capital is available to the company indefinitely and doesn’t have to be repaid. Self-financing can be either internal or external. Internal self-financing is when the company’s profits come from the sale of assets, for instance machines, tools, or company equipment. A business self-financed externally would receive capital from external financiers, for example investors with stakes in the company or subsidies that don’t need to be repaid. 
• Debt financing: debt capital describes a company’s debts, its liabilities and provisions. Such capital is available for a limited amount of time and must be repaid. 

• Equity vs. debt capital
• Internally financed self-financing
• Externally financed equity capital
• Debt financing
• All options at a glance

Equity vs. debt capital

• With more equity capital, your company is more likely to make a big impression, and it will become easier to raise debt capital at favourable conditions;
• High equity shares may deter lenders;
• Low equity should be increased, like in the case of a bank loan. It’s important to note that this makes most sense in low-interest phases and if the return on equity is higher than the interest incurred. 

Internally financed self-financing

• Self-financing: generated profits are retained. This is called profit retention). There’s also a distinction between open and silent self-financing: open financing is when the profits are left in the company; hidden self-financing is the release of hidden reserves;
• Asset reallocations/depreciations: liquid funds are released, thereby offsetting reductions in the value of fixed and current assets. 

Externally financed equity capital

• Bootstrapping: an attractive financing method for those who can afford it, bootstrapping is when you finance your startup on your own. This allows you to remain independent and capable of achieving success quickly. Fair warning though, depending on how much money you have to invest, bootstrapping may leave you no room for failure; 
• Increase in shareholder contributions: your equity capital is increased by shareholder contributions. New shareholders can be admitted to make further contributions;
• Share issues: joint-stock companies increase their equity capital by issuing new shares;
• Private equity: investors buy into a company and also acquire a say in the company with their participation;
• Venture capital: venture capital is provided by investors free of interest. They instead receive company shares which can be later sold at a profit. Benefit from their knowledge by joining professional networks;
• Incubators and accelerators: here, too, you receive support in the form of capital as well as a network and the know-how of your backers; 
• Business angels: business angels are experienced entrepreneurs only too happy to share advice and invest money into the startup scene; 
• Crowdfunding and crowdinvesting: increasingly popular ways to generate capital, crowdfunding and investing are made possible by the internet and crowdfunding channels like Patreon. Investors in this case are usually happy to assist financially without much promise of return. It’s more about the belief in an entrepreneur or an idea. Crowdfunding will require you to have an already-established business idea, and some reward for their efforts. 

Debt financing

• Provisions: money held back for tax, possible legal costs or pensions. These funds are available to the business until they are paid out;
• Bank loans: the difficulty with bank loans is that a bank will always expect collateral and are bound by strict rules when granting loans. To have your loan application approved, you’ll need a solid and convincing business model. Paying off the loan can then become an enormous burden, especially at the beginning. That said, once the bank is convinced, the investors will come; 
• Government funding programmes: startup founders whose ventures fit the startup portal of the Federal Ministry for Economic Affairs and Energy (BMWi) benefit from state support programs. The promotional loans offered by the state have favourable interest rates, long terms, and a repayment-free startup phase. Investment companies like Kreditanstalt für Wiederaufbau (KfW) and the High-Tech Gründerfonds (HTGF) will also provide financial support to startups in Germany; 
• Friends and family: finding support from friends and family is another desirable option. You likely won’t have to pay interest and the collateral will be less severe, given that these are not usually professional contexts;
• Factoring: often a good option in urgent situations, companies can sell outstanding receivables (e.g. invoices) to a third party at a discounted price. It’s usually a short-term solution to increase a company’s liquidity; 

All options at a glance

Corporate financing in the changing phases of a company 

Which KPIs should be taken into account when financing a business?

• The equity ratio: indicates the ratio of equity to the total capital of a company 
• The cash flow: determines the cash inflow or outflow of a company in a certain accounting period
• The return on equity: indicates the ratio between your profit and the equity capital employed 
• Return on Sales (ROS): indicates what percentage of the turnover remains as profit 
• Return of Investment (ROI): calculates the relationship between your profit and your investments