There are many situations in which companies require funding and capital: during start-up, but also when they need to finance growth, when they are looking to fund a company acquisition, if they change their business model, or if they carry out fundamental restructuring in response to a crisis. The range of possible forms of financing is extensive. They range from internally generated financing and mezzanine funding to classic loans with the help of banks or tapping into capital markets.
To ensure uninterrupted access to adequate funding, managers should keep an eye on their financial and liquidity situation and look out for signs of emerging liquidity risks. Using a mixture of different financing instruments also plays an important role in ensuring secure funding. The principle behind this approach is to use different forms of financing to reduce dependency on individual funding providers and financing instruments.
To achieve this goal, it is essential that capital tie-up periods are aligned with the assets concerned. Financing for fixed assets which are tied up long term should be covered by equity or long-term debt. Attention should always be paid to possible provision of collateral for borrowed capital, starting with the question of which collateral should be granted to whom. Providers of venture capital, i.e. capital provided to companies early in their life cycle, or private equity funds, which seek to acquire controlling interests, usually ask for extensive rights of influence as a condition of their involvement, as well as options to increase, reduce or dispose of their investment at certain points.
However, such strong investor influence can also have a positive effect on the company, particularly if the funding provider has a thorough knowledge of the relevant sector, anticipates trends and contributes to the development of ideas for the company’s future evolution. In these cases, the interests of the finance provider and the company strongly overlap and the commitment has a different quality to bank financing. The converse is also true: if the parties do not have a common vision for the company, they should end the cooperation.
Financing by banks is still the most common form of business financing. Companies typically use a combination of short-term and long-term loans to provide the right fit for their funding needs. Interest on these loans is usually lower, but access to the loans is typically conditional on provision of collateral.
There is an important rule of thumb in business financing: transparency is a borrower’s trump card. Managers must be able to show their lenders or other financial backers, transparently and credibly, that their business model will be viable over the months and years to come. Companies in crisis should be able to explain what caused the problems and how they can be resolved.
Growth is possible even during or following times of crisis, if there is a clearly defined business model. If there is a clear picture of core business activities, a company can use its existing know-how to grow organically or even make targeted acquisitions. Prospects for growth are an important signal for lenders, who are more likely to take on the risk of providing further financing if a borrower has a convincing growth story.
