Historically, if an entrepreneur needs money for business development, he primarily turns to his bank. However, today the possibilities of financing are much wider, and it is not for nothing that the financing provided by banks in other parts of Europe and the world is placed in the same buckets compared to the amounts of loans from alternative financiers.
It is influenced by the speed of availability of financing, compliance with the requirements of regulators and other factors that determine when bank and non-bank financing is more suitable.
Understanding of financing opportunities outside of banks is slowly but growing in Latvia as well. More and more often, company managers understand that they must also be able to navigate well in bank financing alternatives. Such alternative financing includes, for example, bond issues used by domestic companies such as Storent, Elko Group, Eco Baltia, share sales on the stock exchange, examples of which are Madara Cosmetics, Virši, Delfingroup, and alternative loan providers used by such companies such as Pure Chocolate, Peruza, Gander and others.
When are banks the best solution?
It should be noted that, of course, in almost all situations, a loan from banks is cheaper than from alternative lenders. Because banks can raise funds relatively cheaply through deposits or interbank loans. Therefore, a bank loan is a good basis for long-term financing, for example, for the purchase of real estate or production equipment. Also, bank financing is suitable in cases where there is no need to hurry with the transaction and you can calmly go through a relatively longer bank loan evaluation process. Banks also offer a fairly wide range of additional services (current accounts, currency exchanges), which can be useful in a company’s day-to-day life and convenient if they are located in one place. However, it should be taken into account that every year the difference in the price of money for receiving in a bank or from an alternative lender has decreased significantly, especially for smaller expenses (up to 100,000 euros). For example, loans from major Latvian banks for companies in the amount of up to 25,000 euros cost from 12-20% per year, which is the same cost range as, for example, the alternative financing company Capitalia.
I would also like to emphasize here that banks, which are now accused of not lending to the economy, do not always have to be the financiers of all companies. It is especially for small companies that it is worth identifying alternatives, because their business is considered more risky according to generally accepted standards, and therefore banks (due to the capital requirements and risk policy set for them) often cannot be financiers of these companies at all.
When to turn to alternative lenders?
The trump card of alternative lenders is the speed and ease of the financing process, and many entrepreneurs value the flexibility of loan repayment terms. As a result, companies very often use alternative lenders as a supplement to existing bank loans, as well as in situations where financing is needed quickly or for a relatively short period of time (up to a couple of years). It is important for entrepreneurs not to miss out on business development opportunities, and a slightly higher cost of capital with alternative lenders often pays off handsomely in terms of time and resources saved. Alternative lenders (including crowdfunding platforms) offer amounts from 10 thousand euros to 1 million. On the other hand, for larger amounts, bonds can be a good solution.
Why release bonds?
Bonds, which are essentially a standardized loan, are issued either by companies that do not have access to bank credit (including fast consumer lenders such as 4Finance and Delfingroup) or those for which this financing complements bank loans (such as Eco Baltia and Storent). . Instead of the company receiving funds from a single financier (as it would be in a bank), bonds allow the company to turn to a wide range of investors, where each one finances part of the capital needed by the company. Organizing a bond issue is a regulated process, so it usually does not pay off for amounts below 3 million euros. The terms of the bonds are usually 3-4 years and they are not amortized – the money is returned to the investors, either by refinancing the old bonds with new ones or by paying them back with other means available to the company.
In what situations is a stock exchange quotation appropriate?
Another financing alternative for companies is to sell their shares on the stock exchange to a wide range of investors. In this way, for example, Madara Cosmetics and Delfingroup have successfully attracted new capital for the development of the company. Using the stock exchange to attract financing is worthwhile even for relatively larger companies. Representation in the stock exchange also gives additional visibility and the opportunity to attract new customers, which, for example, has been successfully used by the fuel dealer Virši. The process of issuing shares is also quite strictly regulated, and the company has to take into account additional reports and monitoring mechanisms, so companies usually go this way if the goal is to attract capital from 5 million euros and above on the stock exchange. In general, the field of alternative financing has progressed very rapidly in recent years and offers very flexible and easily accessible capital, which is currently only slightly more expensive than the funds offered by banks. Financing is one of the daily working tools in every entrepreneur’s workshop. Therefore, it is important for every manager to understand the arsenal of options and to be aware of which tools to use in which situations. And in defense of the banks, I can say that there is already quite a lot of competition in the market in lending to companies, only companies should become more open and knowledgeable about the alternatives available on the market. Alternative financiers of companies are not opponents of banks, but partners, as their goal is also to promote the development of companies and the national economy.
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