In order to increase its activity and develop, a company needs money and therefore financing. It must be able to buy machines to ensure its production, for example.
How do business leaders find the necessary funds to develop a company?
Borrowing is one of the proposed solutions
It can take different forms:
- A traditional bank loan: This loan is most often limited by the maximum amount that the company’s manager has contributed to his company.
- A loan of honour also called a “repayable advance”: It is generally offered by an institution or region with a very attractive interest rate.
- A bond loan issued by the company: A bond is an amount lent to a company by an organization or an individual with interest in return.
When a company issues shares, it sells part of its capital, part of itself. A buyer of shares, a shareholder, then has two expectations: The first is to receive dividends following the positive results of the company in which he has invested. The second is to resell his shares at a price more expensive than he bought them.
The sale and purchase of shares takes place on the stock markets. To access it, a company must regularly publish information on its financial health.
It must therefore use an outside firm or a specialized person to certify the information it discloses. This has a significant cost.
Another financing alternative: Private equity investment
The sale and purchase of shares may also be made directly to investors. There are several types of them at different stages of the company’s life:
- Seed capital: This will make it possible to finance the creation of the company and develop its first products. If investors have a close relationship with the manager, such as relatives or friends, then we talk about “Love Money”.
- Venture capital: It mainly concerns innovative companies that have the potential to make a lot of money quickly but that nevertheless have a risk of failing and thus never seeing their innovation out in the open. In the case of private investors called “Business Angel”, they also bring their network of professionals and experience to best develop their innovative products and services.
- Development capital: This type of financing is intended for companies that are already profitable and need more capital to accelerate their growth and turnover. (By having activities abroad for example).
Crowdfunding: A new way of financing
Another type of financing has become increasingly popular in recent years. This is called “Crowdfunding”. In other words, it is a participatory system. It allows individuals to invest in companies directly from the Internet. They can invest in shares in loans or grants.
Whether through borrowing or equity issues, companies have several financing options depending on the amount of money they need, their strategy or their size.
- Do you want to start on the stock market? Start by reading our special report on the basics of the scholarship.