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It’s been two months since the year 2022 began and we hope you have finalized your budget for the current year. One of the advantages of preparing a budget is to highlight the financing needs. At this point it is important to consider whether the company can meet these needs and if not, what financing options are most appropriate. Now that you have identified your financing needs, which financial actors should you turn to?
There are two main types of financing: “dilutive” and “non-dilutive”:
- Dilutive: these types of financing come in reinforcement of the capital of the company which they brought by the means of a capital increase
- Non-dilutive: this refers to all forms of credit that do not affect the company’s own capital and therefore do not dilute the shareholding.
There are certain types of financing that have hybrid characteristics such as mezzanine and convertible loans. We will soon look at the details of the different types of financing. In this article, we will mainly focus on the non-dilutive types of financing
We present below the main players in corporate financing.
Non-dilutive financing
Non-dilutive financing allows you not to necessarily have recourse to investors and to keep control of your company. On the other hand, most of the time when one resorts to non-dilutive financing, it is above all necessary to respect a schedule, which requires organization and a very good management of its project. Here are some examples of non-dilutive financing.
Private debt funds
A private debt fund specializes in the type of lending activity that is managed by a variety of entities other than banks. These funds raise money from investors before lending that money to a wide range of businesses. While a private debt fund is primarily used as an alternative to traditional bank loans, it can also provide investors with access to stable returns through private debt as a separate asset class.
Factoring
Factoring, receivables factoring or accounts receivable financing, involves a company purchasing a debt or invoice from another company. Factoring is also considered a form of invoice discounting in many markets and is very similar, but in a different context. In this purchase, receivables are discounted to allow the buyer to make a profit when the debt is settled. Essentially, factoring transfers ownership of the accounts to another party who then collects the debt.
Thus, factoring relieves the first party of a debt for less than the full amount, allowing them to have working capital to continue their business, while the buyer, or factor, collects the debt for the full amount and makes a profit when it is paid. The factor is required to pay an additional fee, usually a small percentage, once the debt is paid. The factoring company may also offer a discount to the indebted party.
Factoring is a very common method used by exporters to accelerate their cash flow. This process allows the exporter to take up to 80% of the value of the sales invoice at the time the goods are delivered and the sales invoice is issued.
Leasing
Leasing differs from purchasing in that the product (usually plant and equipment, e.g. machinery, technical equipment, vehicles) is purchased by the leasing company and made available to the lessee for use as he wishes for a defined period (without transfer of ownership). The advantage of this form of medium- or long-term financing for investments is that the lessee only has to make one monthly payment, which means that he does not tie up so much cash.
Bank investors
Banks may be willing to provide some type of overdraft and long-term lending when that lending can be secured by significant assets such as land and buildings. However, it is often more difficult for SMEs to obtain medium-term financing to fund their operations, as banks are traditionally quite conservative. This is understandable, as the loss of a defaulted loan requires many good loans to recoup that loss. As a result, many SMEs end up financing medium-term, and potentially longer-term, assets with short-term financing such as overdraft loans. This is a less than ideal situation. In addition, banks often require personal guarantees from the owner-manager of the SME, which means that the owner-manager must risk his or her personal wealth to finance the business.
Crowdlending
Crowdlending allows companies to finance themselves through an internet platform by a large and diverse group of people, without having to go through a bank. In the crowdlending model, people lend small amounts of money to a business in exchange for a financial return stipulated in a loan contract. With crowdlending, a new financing alternative exists to obtain funding for their investments, with which they can diversify their sources of funds, or the positive marketing campaign of the crowdlending campaign.
On the other hand, private investors benefit from higher returns, know exactly where their money is invested and decide on the use of their money, which generates a positive impact.
Do you have questions about credit financing or your company’s financial capacity to take on credit? Make an appointment with our expert today using the contact form.
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