Financing: Overview of sources of financing

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Financing is an essential part of creating a company or developing a business. This overview, which provides details about the different sources of financing, is a good starting point on the topic. 

Companies have very different financial needs depending on the stage of their development. Not only do the financial resources companies require vary considerably during their lifetime, but the origin of the funds also tends to change.

Financial development of companies

Based on the origin of the funds obtained, it is possible to distinguish between external financing and internal financing, depending on whether the capital of the company is composed of funds made available by third parties through the credit or capital market, or whether the funds originate from the performance achieved by the company.

External funds (or third-party funds) of a company include capital made available by third parties in the form of fixed-period loans, while equity refers to the resources provided by the owners of a business or the profits made that remain in the business.

Graphic. Shows the different forms and sources of internal and external financing

For young entrepreneurs, obtaining financing for their company is a real challenge. Firstly, internal financing is not really feasible during the start-up phase of a business, either through self-financing (retention of profits) or financing through depreciation or provisions. Secondly, it is important to first establish links and a relationship of trust with banks and investors. For this reason, it is not uncommon that, during the initial creation phase of the company, at the time when they are turning their bright ideas into reality, young entrepreneurs seeking financing must turn to their family or acquaintances.

Given that an entrepreneur who has just created his or her company is generally unable to resort to internal financing, external financing is becoming increasingly important. In such cases, we differentiate between debt financing and equity financing. In addition, special forms exist such as factoring and leasing.

Debt financing

When a company resorts to debt financing, capital is loaned for a fixed period. Most frequently, this source of financing takes the form of bank credit, but it can also constitute loans granted by private individuals.

Creditors seek to minimize the risk of default as much as possible and, as a result, impose certain requirements on the borrower company. This means that when a young entrepreneur seeks to obtain financing from the bank, he or she must provide the reasons and clearly indicate the financial need. When granting credit, banks check the solvency of the company—checks that are usually based on a business plan.

Risk-adjusted pricing allows credit conditions to be tailored to the individual risk. Banks rely on the profitability of the company to assess risks based on internal rating models.

Bank credit

Crowdlending is a special form of financing through loans involving a large number of lenders. Here again, lenders expect that the borrower company wil not only repay on time the funds made available but also that it will pay them appropriate compensation on a regular basis.

Crowdlending 

Equity financing

In addition to debt financing, young entrepreneurs can procure the resources they need through equity financing. Two channels exist for obtaining venture capital: business angels and venture capital companies.

Business angels

Venture capital companies

Switzerland has an open and active venture capital market which is mainly supported by foreign funds. Over the last few years, several sources have increased their investments in Switzerland significantly.

Equity financing can also, within the scope of various projects, take the form of crowdinvesting. This consists of reaching out to a large number of lenders who, in principle, each provide a small part of the total amount. As a general rule, investors are contacted through online platforms.

Crowdinvesting 

Mezzanine financing

Mezzanine capital is a hybrid form combining borrowed funds and equity funds (venture capital). This form of financing lies between ordinary equity and a senior loan. To compensate for the increased risk associated with this type of operation, many mezzanine-type lenders, in addition to obtaining a fixed remuneration for their loan, contribute to the growth of the value of the company, e.g. by means of an option to purchase a given portion of the capital of the borrowing company.

Mezzanine capital 

Special forms

In addition to debt financing and equity financing, companies may resort to special forms of financing.

Factoring

Leasing

Crowdfunding

Cryptocurrency fundraising (ICO / ITO)


Government aid for financing companies

The Confederation and cantons provide an alternative means for the financing of companies, in addition to the financial market offer.

Government aid for financing companies



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Last modification 27.09.2019

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