For financing your company there are several options. Most important options at this moment are;
- Bank loans
- Crowd Funding
- Lending by guilds
- Funding via VC or PE
- Funding via M&A
Financing alternatives for your business in 2014
(Is it getting better ?)
In this blog article I would like to give some thoughts to business owners on how to raise financing for their business. The (lack of) funding is still a major issue in the majority of European countries. I also would like to start a discussion on what you encounter in practice and the experiences you have. It is often said that bank loans are an important factor for economic growth as they enable companies to invest in new technologies, innovation, international (or domestic) sales. All these actions create economic activity, but does it also add value for the economy as a whole or put it differently: How crucial is bank funding in your opinion ?
Bank loans have always been the largest and most traditional way of solving funding requirements from businesses. They still exist but many business owners complain about it becoming more and more difficult or actually impossible to obtain this source of financing. It has been said various times the last years that improvement was around the corner. Have you seen this improvement ? Do you still see bank financing as the major source of funding and when do you think the availability of funding will improve again ?
Crowd Funding is a way of funding that has come up only the last decade. It is mostly a way of equity funding (compared to debt funding) whereby the crowd who participates gets shares in the company and becomes a shareholder. People put in money, mostly relatively small amounts as the number of people that invest is large, hence the name ‘crowd’ funding. All these people become a shareholder in the company. There is mostly a relatively high burden of administration given the large number of investors involved. However, there are website’s who automate great parts of this process and take away a big piece of the administrative burden. One questions whether crowd funding will one day become a serious source of funding for the mainstream business ? Or will it just be a form of financing for the most fancy and consumer focused internet ventures and the occasional wild success ?
Lending by guilds, local governments or government related funds
In the first years of the recession we have seen some local governments in the Netherlands preparing funds to be used as funding for loans to businesses. These funds could be up to 25 million Euro often put in the market by regional investment firms. As far as I am aware similar structures existed in other European countries. These ways of funding where mostly temporary and have ceased to exist in many cases.
Another funding format I have seen recently is the set-up of funding by companies from a similar group. This very much goes back to traditional forms of lending as executed by the historic guilds. This group was focusing on companies in the same region where companies doing well could lend their excess funds for a 6% compensation and borrowers would pay 8%, the difference being used to cover the costs of the management. It seemed that borrowers did exists but lenders were still more difficult to find. Do you see this type of funding make a comeback ?
Funding via Venture Capital or Private Equity
If you are a fast growing start-up business attracting capital via Venture Capital is a serious possibility. However, in practice we see only the best of the best getting funded by VC funds and the number of deals is relatively low compared to the total number of companies looking for VC money.
In my opinion the same applies, although to a lesser extend, to Private Equity. There is not so many companies that get interest from PE investors and these type of investors analyze a lot of companies before they make an actual investment. This is logical of course given the risks involved. Further the size of the companies that do get this type of investment is normally large (>50M Euro revenue) and only a small part of the total economy consists of these type of companies. If you see this different please react.
Funding via M&A
We do get regular requests from companies that want to fund their business via M&A. Their interest is mostly to sell the full business or get investors for a minority share. We always check the background to see what the real reason behind these requests to sell a business is. It mostly is a combination of various items involved. Very often there is a lack of working capital combined with a true desire of the business owner to hand-over the business. Other reasons can be the strategic consolidation happening in a specific industry, low equity of the company due to bad times, difficult market circumstances, a lack of cash, interest to pursue investment initiatives or other personal circumstances of the business owner. Given it is always a mix of reasons it is sometimes difficult to judge the true and most determining factors. Each case has its own merits and specific circumstances. Sometimes we do advice to go for M&A as a solution for the situation of a business owner. Sometimes we advice that it is better to use a different route to get funding. What’s your opinion, do you see M&A as a valid source to solve funding issues?
George Charalambides | Thursday 27 March 2014 | website: www.exescosnulting.com
I definitely see M&A (usually sale of a minority stakes/ strategic investor)as a source of finance. Many companies that cannot obtain bank financing consider finding a strategic investor as a good alternative. This is the case with a number of our clients in Greece.
Also, franchising can also be a way to finance and grow the business.