When companies consider larger growth plans, their internal resources may often be inadequate to fund the next, expansionary stage of development. As a result they need to turn to outside financing.
Depending on life-cycle phase, growth strategy and financial needs, companies have a choice of financial instruments and partners. It is advisable to analyse the available options at an early stage when planning a growth project.
Classic financing through bank loans is only one of various financing possibilities using external funds. As lenders usually require security and are only rarely prepared to finance risky projects, the use of classic loans for growth financing is restricted.
In addition, financing using borrowed capital involves a specific term and is usually tied to a specific purpose. As regards financing costs, borrowed capital involves interest and amortization payments, which weigh on the business operations and liquidity of growth-oriented companies.
The conditions attached to this form of financing depend on the company’s creditworthiness (company rating) and the purpose of the financing.
Compared to forms of financing based on equity capital, for which the expected returns rise with risk, borrowed capital is a relatively cheap form of financing on account of the higher collateral requirements.
Growth strategies and financing options
It is necessary to distinguish between specific forms of financing on the basis of the company's life-cycle phase and its strategic decision in favour of expansionary development: growth financing, capital expenditure financing, acquisition financing and project financing. In principle, all of these forms of financing are basically concerned with growth. Hence, it is not always possible to clearly distinguish or define the appropriate form of financing for the adopted strategic measure.
Sources of growth financing
The prime source of financing for risky projects are investors willing to bear the correspondingly higher level of risk. These may be existing shareholders or, depending on the risk involved, venture capital or private equity firms or risk-bearing providers of capital. As a reward for bearing greater risk they will expect to receive correspondingly higher returns. The degree of risk will also determine the form, conditions and sources of the financing:
As an international, independent consulting firm focused on small and medium-sized companies (SMEs), we accompany and support you in your financing project. We look forward to welcoming you to a personal meeting to discuss your growth project and consider the suitable form of financing.