Growth-oriented companies need capital for financing at various stages
Bad Marienberg (www.aktiencheck.de) – Companies with great growth potential are interesting for risk-taking investors because above-average returns can be achieved on an investment. In the last few years before savings interest rates returned, raising capital was cheaper than ever before. At the same time, digitalization, globalization and technical progress gave rise to new business models, some of which could be scaled very successfully.
However, the change in interest rates has ensured that debt-financed companies are under particularly high pressure to grow because investors’ return expectations have increased. However, due to the existing alternatives for safe investments, growth companies now have to be much more creative when raising capital. Solid financing is particularly important in volatile markets so that money does not run out in the middle of the growth phase.
We will therefore take a look below at which strategies for raising capital continue to work. We address both opportunities for young start-ups and options for established companies.
Classic financing via bank loan or credit
Bank loans or loans are a frequently used form of debt financing for growth companies. In volatile markets, loans can be a sensible option under certain conditions to cover short-term liquidity needs or to finance medium-term growth.
The challenge for companies is to generate more returns than the loan or credit costs in interest. However, since growth-oriented companies are often still in loss at the beginning, such debt capital can quickly become a risk of insolvency if the installments can no longer be met.
So before companies have one Apply for a business loan, a plan should definitely be drawn up as to how the installments from current business can be met. The bank or other lender will probably require this anyway.
The big advantage of financing with a loan or credit is that the debt is paid off at some point and no shares in the company have to be given up. However, there are also models in which company loans can be converted into shares. However, such agreements are rarely found in traditional banking.
Tip: In Germany the Kreditanstalt für Wiederaufbau (KfW) offers cheap promotional loans for companies ready. These loans often have lower interest rates and longer terms than conventional bank loans. They are designed to support companies at different stages of their growth, including navigating uncertainty.
Private equity and venture capital to raise capital
Both private equity and venture capital follow a similar principle when raising capital: investors receive company shares and the growth company is provided with fresh capital. The share capital is often increased for this purpose. In some cases, the shareholders’ existing shares can also be taken over if they are seeking a (partial) exit.
Private equity companies invest in established companies. This can be an option for growth companies that are in an advanced stage of development or already have a stable core business.
The awarding of venture capital, on the other hand, is a popular financing option for start-ups with growth potential. Compared to private equity investments, venture capital is even riskier for investors, which is why high growth potential is required.
Particularly in uncertain and rapidly developing markets, such equity capital can be an attractive option because the initial pressure to achieve profitability can often be postponed somewhat.
In addition, private equity and venture capital investors are often actively involved in their investments, provided they have an understanding of the industry or can provide strategic resources in general.
Enter into joint ventures and strategic partnerships
In volatile markets, establishing joint ventures or forming strategic partnerships can be an effective way to raise capital in exchange for participation rights. Often one of the companies involved is significantly more experienced and financially stronger, so the start-up can benefit from this.
Collaborating with other companies also allows resources to be shared and risks to be minimized. These partnerships can also open up additional sources of financing, as a creditworthy joint venture partner probably has a better credit rating with banks than a newly founded company.
The advantage compared to private equity or venture capital is that both partners usually work even more operationally on the joint company and no return expectations from external investors, such as a private equity fund, have to be met.
Issue corporate bonds for growth projects
Companies can invest capital by issuing Bonds procure. These debt securities are purchased by investors who, in return, receive regular interest payments and a promise of full repayment upon maturity.
Corporate bonds can be a cheaper alternative to other forms of financing and allow companies to raise capital without having to give up shares. However, issuing bonds is significantly more complicated because the bond concept has to be checked by BaFin.
Another option is to issue so-called convertible bonds. These are hybrid financial instruments that have characteristics of both bonds and stocks. They offer investors regular interest payments like bonds, but can be converted into common stock under certain conditions.
Basically, issuing bonds is a financing strategy that is more commonly used by established companies. Both private and institutional investors could have very high interest rate expectations if the company is still young and the repayment of the bond amount is therefore questionable.
Aim to diversify financial sources
Finally, there is some general strategic advice that should be heeded by entrepreneurs who want to remain liquid and capable of growth in different market phases.
Especially in uncertain markets, it is important not to be dependent on a single source of financing. Both founders and established companies should consider various sources – including equity capital, bank loans or venture capital.
Through broad diversification, companies can increase their financial flexibility and respond better to market uncertainties. The withdrawal of investors or the bankruptcy of an important lender can have massive consequences, such as Signa Holding went bankrupt last year has shown.
In particular, consideration should be given to which forms of financing are used in which phase of the company. The construction of a prototype can perhaps be carried out with a classic bank loan, for which the subscribed company capital is sufficient as security. However, for long-term growth, venture capital in exchange for company shares is probably the better choice. (01/23/2024/ac/a/m)
2024-01-23 18:09:35
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