Corporate finance for SMEs

If a company needs capital, for example to cover costs for product development, to procure goods, to bridge financial bottlenecks between delivery of goods and payment or to invest in company growth, they have various options. A distinction is made here between external financing, internal financing, equity financing and debt financing.

However, it is particularly difficult for newly established or fast-growing companies to obtain a loan through a traditional bank. The solution is alternative financing, as offered by fulfin. Which form of business is right for you depends on the initial situation and the entrepreneurial goals.

What is meant by corporate finance?

Corporate financing is considered to be all measures that deal with the planning and implementation of the financing of a company and serve to raise outside capital. In the context of corporate financing, however, there is not only debt financing, but also equity financing through equity capital to increase the contribution or new participations. When classifying the forms of financing, a distinction is made between internal and external financing in addition to equity and debt financing.

In the case of internal and external financing, it is important where the capital comes from, and in the case of equity and debt financing, the question is what conditions are attached to the available capital.

REMINDER:

• Internal and external financingWhere does the capital come from?
• Own– and debt financing: What are the conditions attached to the capital?

What forms of corporate finance are there?

Where does the capital come from? With internal financing, the money comes from within the company and with external financing, it is external capital funds.

• Internal financing: The capital can be drawn from the company's own entrepreneurial activity, so that no external help is needed. A classic form of internal financing is the use of profit for business growth. However, capital can also be released through business operations, e.g. through asset reallocations. This involves the sale of valuable assets such as business equipment, machinery and stock. Another form of internal financing is depreciation and accruals.
• External financing: The capital comes from external sources; conceivable here are increases in contributions by the shareholders, who bring in their private capital, or the participation of new shareholders (e.g. shares, participations). External financing also includes classic credits and loans from banks or other financiers. Other forms are leasing and factoring.

In what form is the capital brought into the company and to what conditions is it attached? In the case of equity financing, the capital is usually a long-term part of the company and in the case of debt financing, the company receives the capital, which is, however, paid back again.

• Self-financing: The capital becomes part of the equity and is available to the company indefinitely, with the financier receiving a share of the profits and/or being able to influence business decisions. 
• Debt financingIn this case, the capital is considered borrowed capital and is only available to the company for a limited period of time and must be repaid in accordance with the agreed loan terms. The lenders have no influence on entrepreneurial decisions.

	Internal financing	External financing
Self-financing	Gains on investments, depreciation, asset reclassifications	Capital contribution increase, participation by new shareholders
Debt financing	Provisions	Credits and loans, factoring, leasing

Bank loans as corporate financing

Although the ECB is trying to get banks to lend more to businesses, many are not taking advantage of it. On the one hand, most companies are foregoing bank loans and choosing other alternative business financing, leaving banks sitting on loans with low interest rates. On the other hand, many businesses are not granted bank loans because they lack the necessary collateral. Especially in e-commerce, it is not easy to convince banks of the entrepreneurial venture; it remains too risky for them to grant a loan.

The situation is different with alternative business financing, such as the financial products from fulfin. We specialise in online trading and know how important it is to have quick access to liquidity in e-commerce. That's why we respond to our customers' needs in a correspondingly fast and uncomplicated manner.

Possibilities of corporate financing

In the first part of this article we clarified what is meant by corporate financing, what different forms it takes and to what extent it can be divided into debt and equity financing or internal and external financing. Now we would like to look at the concrete possibilities of corporate financing.  

Company loan

The classic way of corporate financing is the investment loan, which helps companies to grow or enables the purchase of new production facilities or products. Working capital loans, also known as overdraft facilities, on the other hand, are a way of bridging liquidation bottlenecks.

Depending on the lender, the requirements and conditions can vary. Land charges on company land, but also financed production facilities can serve as collateral. With the Inventory Financing: the equivalent value of the goods in the warehouse is taken as security. Furthermore, it is possible for the shareholders or business owners to act as private individuals as guarantors for the company.

IPO

The IPO is almost exclusively suitable for medium-sized companies in the three-digit million range with a capital requirement of 50 million euros or more. The IPO enables publicity, a structural improvement in the company and provides new capital at any time.

In the case of an IPO, the risk lies primarily in the long preparation time, the associated high costs and external control (reporting obligations, shareholders' voting rights).

private equity

The English term private equity refers to equity capital. Private equity companies invest in companies and benefit from their profits, while the company gains new opportunities for growth. The advantage of this type of corporate financing lies primarily in the fact that the knowledge and contacts of the investor benefit the company.

This form of corporate financing is suitable for medium-sized companies with capital requirements of between 5 and 40 million euros. However, there is a risk in the control in the case of a majority shareholding and an often only medium-term commitment of the capital provider of around 3 to 7 years.

Bonds

Bonds, on the other hand, are an optimal form of corporate financing for medium-sized companies with a well-known name or brand that have a capital requirement of 30 million euros or more. Bonds provide a positive image effect through the presence of the company on the capital market. Although no collateral is required, the high costs of up to 6% of the issue volume plus further interest payments represent a risk factor.

Leasing

Leasing is another well-known form of corporate financing and corresponds to an object-linked rental agreement that is concluded with the company by the respective manufacturer or a leasing company. Against payment of a leasing fee, the company receives the right to use specific goods (e.g. machinery, equipment, vehicles).

The lessee does not have to take care of the maintenance and repair of the goods, this is the responsibility of the lessor.

Leasing is not only suitable for medium-sized companies that have a need for expensive capital goods, but also for smaller companies and larger corporations. Leasing usually offers flexible terms and a selectable scope of leasing conditions. The main risk is liability for damage to the asset and in some circumstances this form of finance can be more expensive than a loan. Although leasing contracts are very flexible and tailored to the needs of entrepreneurs, there is a poor comparability of offers.

Factoring

Factoring is a popular form of business financing for self-employed people of all kinds - be they small businesses, medium-sized companies, large corporations or freelancers. However, factoring is particularly suitable for medium-sized companies with liquidity problems or customers who are unable to pay. Factoring is an innovative instrument whereby a company can sell its outstanding receivables to a factoring company in order to ensure continuous and sustained liquidity. These receivables may have arisen due to deliveries of goods or services.

In the event of a payment default, the commissioned factoring company bears the risk. This form of corporate financing is a fast and uncomplicated way of procuring liquidity.

Forms of factoring:

• Assumption of the risk of default: Genuine factoring.
• No assumption of default risk: Non-genuine factoring.
• In-house factoring:The accounting remains with the factoring client, even if the factoring company assumes the default risk.
• Online factoring: Processes are executed online.

A further distinction is made between

• Export- and Import factoring
• Open and silent factoring
• Maturity factoring
• Bulk Factoring and
• Full-Service Factoring.

Nevertheless, factoring also involves a certain risk, as it can be associated with high costs, which in turn depend on the number of invoices, the payment terms, the company's own rating and the creditworthiness of the customers.

The costs of factoring can amount to up to 4 % of the receivable amount, although these can also be significantly higher. On the other hand, factoring provides the company with sufficient liquidity again and it does not take any risk due to payment defaults.

Crowdfunding

Crowdfunding is an alternative form of financing that is used primarily by startups, but also by small and medium-sized enterprises, artists and private individuals. The focus of the financing is the crowd - i.e. as large a group of investors as possible who want to support a project financially. That is why crowdfunding is also called Schwarmfinanzierung in German from time to time.

Crowdfunding differs from traditional forms of financing in the following ways:

• There are many different funders.
• The investors have little or no influence on the company's operations.
• Coordination and implementation are carried out via special crowdfunding platforms.
• It is exclusively digital.
• It usually gets a lot of public attention through various marketing efforts.

Venture Capital and Business Angels

Venture capital is another form of corporate financing and is primarily used to promote and finance start-ups. Investors are either other companies or venture capital funds or business angels. A well-known term for venture capital in the German-speaking world is "Beteiligungskapital". Here, any capital that an investor invests in order to take a stake in a company is referred to as equity capital. If the company is successful and achieves profits, then the co-owner profits according to his shares.

The main difference to other forms of corporate financing is that venture capital not only provides the company with short-term liquidity, but the investor also supports the company at the same time. Thus, he has access to the company networks and usually even participates in the management. In contrast to business angels, venture capital companies only get involved once initial experience has been gained. Business angels, on the other hand, invest at the earliest possible stage of the company's formation.

Corporate financing especially for company founders

Promotional loans

In addition to financing by private investors (crowdfunding, venture capital, business angels), company founders can also receive financial support from public capital providers in some cases. For example, the KfW (Kreditanstalt für Wiederaufbau) or the Investitionsbank Berlin (IBB) offer development loans for start-ups. The IBB offers special offers and conditions for financing up to an amount of 5,000 euros and advertises that it will approve the loan within 2 weeks.

Furthermore, the Federal Government of the Länder enables business founders and start-ups to obtain company financing through various financing offers. The BMWi start-up portal of the Federal Ministry of Economics and Technology provides information on various financing models and offers assistance in taking the first steps towards self-employment. The EXIST start-up grant from the Federal Ministry of Economics and Technology helps company founders from universities and non-university research institutions to draw up a business plan and obtain company financing.

The state subsidy can be interesting for some company founders, but not for others. One disadvantage of the subsidised loans is above all the long approval period.

Special features of corporate financing for SMEs

Small and medium-sized companies find it more difficult to obtain corporate financing. Especially in online retail, where quick liquidity is essential for the existence of the company, the necessary funds are often lacking. Yet it is precisely these companies that need capital in order to be able to continue their business processes. Capital must be available to procure new goods, manufacture products, cover ancillary costs and bridge bottlenecks between incoming payments and orders. Unfortunately, many online shops do not get beyond their initial phase, as they usually finance themselves with equity and ultimately no longer have enough capital to continue their business processes smoothly.  

Considerations for choosing the right business financing 

To ensure growth through smooth business processes, alternative financing solutions are available. Which form of corporate financing is ultimately the optimal choice for you depends on a variety of factors, your investment project, your corporate goals as well as your initial situation.

Before you decide on the right business financing, you should think about the following questions:

• What are your ongoing operating costs?
• How expensive is the business equipment (machinery, plant, fleet)?
• If there are goods in the warehouse, the equivalent value of which can be paid for Inventory Financing: as collateral?
• What are the funding requirements?
• Is the funding tied to a purpose or is it purpose-free?
• Are long or short terms preferred?
• Do I want to bridge short-term payment bottlenecks? (Financing of Goods, Purchase Financing)

Conclusion

Established companies can access fresh capital relatively easily thanks to long-standing balance sheets and business evaluations. However, the situation is different for newly established, fast-growing small and medium-sized companies (e.g. online shops in e-commerce), which usually have considerable difficulties in obtaining a traditional bank loan and are confronted with numerous hurdles. Due to a lack of collateral and an increasingly restrictive money lending policy on the part of credit institutions, it is not easy for SMEs and start-ups to secure corporate financing.

Therefore, companies are encouraged to maintain the stability of their business through equity and internal financing. Fortunately, there are many alternatives besides classical corporate financing; fulfin also offers some interesting solutions here.

FAQ

What is meant by corporate finance?

Corporate financing refers to all measures that help to raise outside capital. In doing so, the company can not only take on debt financing, but also equity financing. However, it is more common to raise outside capital in the form of loans, leasing or factoring.

What financing options are available for companies?

If a company needs capital, it has various options for obtaining it. A distinction is made between debt and equity financing as well as external and internal financing. Loans, leasing and factoring are classic options for external financing.

How does corporate finance work?

Loans are made available to companies in a fixed amount for a certain period of time. The terms can vary from a few months to years. Fulfin offers short-term loans up to a maximum of 6 months.

Why is corporate finance important?

Corporate financing is important for a company to be able to start up, grow and survive. With the help of financing, costs for the procurement of goods and product development can be covered and the time span between delivery of the goods and payment can be bridged.