What corporate financing options are available?
A transaction is a complex process that also involves financing issues. Only 100% suitable corporate financing can lead to the successful development of a company. This involves both the procurement of capital and the planning and control of its internal use. The decisive factor is always an individual and customized financing solution. In this article, we would like to inform you about the requirements for corporate financing and the various options available.
Reasons for corporate finance
Typical reasons for corporate financing include:
- covering production costs (working capital financing)
- increasing production or opening new markets (growth financing)
- the further expansion of the business (financing of investments)
- the purchase or takeover of a company (acquisition financing)
- the change of current financing to another form (refinancing)
Basic requirements for corporate finance
Capital is always needed to achieve corporate goals – whether short-term or long-term. The basis for determining your financing requirements is a well-founded business plan. The aim should be to ensure the long-term liquidity of the company, from its foundation to its successful expansion.
A few basic questions can help you to determine your financing requirements and clarify which types are suitable:
- What phase is your company in??
- Can you invest in your company yourself?
- Is there capital from the company that is available for financing?
- Is debt capital required?
- Would you like to remain independent or bring in partners & investors?
- – What is the optimum ratio between equity and debt capital in your case?
Determination of capital requirements based on key figures
The next step is to measure your company’s success. The following key figures are helpful for this:
- the equity ratio to define the ratio of equity to the company’s total capital
- the cash flow to determine the company’s cash inflow or outflow in a specific accounting period
- return on equity to indicate the relationship between profit and equity employed
- the return on sales (ROS) to determine the amount of turnover that remains as profit
- the return on investment (ROI) to calculate the relationship between profit and investment
Types of corporate finance
When it comes to corporate financing, there are several types of equity and debt financing. A combination of equity and debt capital is often the best option.
Corporate finance with equity
- Profit retention: The company’s own profits flow back into the company
- Equity subsidies: public subsidy programs
- Capital increase by shareholders: Shareholders are acquired who co-invest in the company
Corporate financing with debt capital
- Credit/loan: Financing via a bank, depending on the type of company, e.g. as a corporate loan, loan for start-ups or loan for the self-employed
- Corporate financing on the capital market: participation of investors in company capital – in venture capital, an investor participates in the company; business angels also participate with their network and know-how
- Factoring: Outstanding receivables are sold to a factoring company, which enables a short-term increase in liquidity
- Leasing: Leasing of expensive assets, the vehicle fleet or machinery
Which form of corporate financing suits you?
There is no one recommended form of corporate financing. The choice always depends on the business model, the financial situation and the phase your company is in and should always be made on an individual basis.
Check all possible options and keep an eye on your finances. Both your company and your financial situation will change, so it may make sense to adjust existing financing after some time.
Avoid typical mistakes in corporate finance
There are some typical pitfalls to avoid on the way to the right corporate financing. Stick to the following tips:
Ensure you have a complete business plan.
If you present an immature concept when planning your business financing, you run the risk of losing the opportunity to obtain a loan or an investor. A business plan that is as detailed as possible should therefore be tackled first.
Build in a generous buffer.
When planning corporate financing, it is important to be realistic and also keep in mind situations in which costs could turn out to be higher than expected and turnover increases somewhat more slowly.
Ensure the highest possible equity ratio.
In order to be able to obtain debt capital, sufficient equity should be available as a basis. Find out about all the funding options and increase the ratio, for example through measures such as factoring or leasing.
Admit to potential problems at an early stage.
If things are not going according to plan, you should admit this to yourself in good time and seek an open discussion with your advisor at the bank or with the investor. The earlier a problem is addressed, the more likely it is that a solution can be found.
Corporate finance is a complex process. As individual as a company is, the possibilities are just as varied. Tailor-made planning is important and certain points should be considered in order to avoid mistakes. The basis for the procedure is a well-founded business plan. When it comes to financial matters in particular, it makes sense to seek expert advice.
Do you need support with corporate financing?
We are happy to advise you when deciding on a financing model. We know what is important when developing a business plan and will also find suitable measures for your company that have long-term potential for success. A financing mix is often the best option. Feel free to contact us so that we can find the right strategy for you too.