Choosing the Right Business Financing

No matter your company’s industry or project development stage, finding the right business financing is undoubtedly a top concern. With numerous ways to secure funding and fuel your growth, how do you make the right choice? From understanding financial structures to exploring available funding options, this article unveils the keys to making informed decisions about financing solutions available in Europe.

1 – Decoding Business Financing: Making the Right Choices

When it comes to financing your business, following the right financial logic is crucial. Financing structure falls into two basic categories: equity or debt. Moreover, funding for a startup differs from that of a development project. Let’s dive into these key principles.

1.1 – Mastering company financial structure

The financial balance sheet shows the relationship between assets and liabilities. Understanding this helps identify the best strategic source of finance for the business taking into account the current balance sheet.

1. At the top of the balance sheet, the ‘stable’ section thrives on long-term resources i.e., equity. The difference between resources and liabilities is your working capital (WC)—the lifeblood of your business.
2. The operating cycle includes current assets and current liabilities. The gap between assets and liabilities corresponds to the working capital requirement (WCR). If it’s positive, working capital covers additional financing needs. If insufficient, the company seeks short-term cash flow to supplement it.
3. Calculate your net working capital—the pulse of your business—by subtracting short-term passive cash from active cash: WC – WCR = NWC (net working capital).

1.2 – The 3 modes of business financing

No matter which cycle your company is in, financing options can be categorised into three main types:

• Self-Financing Capacity (SFC)
• Equity
• Debt

For the rest of this article, we will focus on two categories. The self-financing capacity (SFC) of year N becomes part of the equity of year N+1 if the company’s profits are retained as reserves.

1.3 – Unlocking financing sources for your company’s project

When securing funding, the stage of development your company has reached is a critical factor to consider.

Financing the establishment of a business can be achieved through various means, including:

• Self-financing
• Family and friends’ support
• Grants and subsidies
• Pre-seed fundraising
• Honour loans
• Crowd equity campaigns

As for the growth stages of a startup, they typically involve:

• Seed funding, Series A, Series B, and beyond
• Crowdlending opportunities
• Bank loans
• Short-term financing like factoring, revenue-based financing (RBF), and embedded invoice financing.

2 – Equity financing for businesses

Let’s explore equity financing! It’s a smart way to invest without burdening your debt capacity. However, securing capital in this category can be a challenge. Keep in mind that as you open up your share capital, your control may dilute.

2.1 – Personal investment, love money and grants

During the early stages, tap into your personal funds, seek support from family and friends (aka love money), and explore available grants, such as European startup grants or the British Business Launchpad.

2.2 – Quasi-equity financing

Financiers categorise certain debts as quasi-equity for balance sheet analysis, excluding them from debt ratio calculations. In this category, we have:

• Shareholder current accounts with lock-up agreements
• Participatory loans, offering flexible repayment terms that are dependent on existing bank loans and assistance.
• Zero-interest microloans provided by organisations like Initiative Europe or the European Entrepreneur Network.
• Convertible bonds that offer the option to convert holdings into shares or equity interests, subject to certain conditions.

2.3 – Fundraising: Capital injection by investors

Startups have a tried-and-true path to financing their ventures.. It involves attracting investment from venture capital firms that specialise in high-growth and high-profit potential projects. Investors seek out projects with immense growth prospects and profitability. Remember, fundraising efforts typically span 6 months to 1 year, especially during the early stages or series A.

2.4 – Angel investors: Boosting success together

Retired executives and seasoned business leaders become ‘angel investors’. They invest their capital into cutting-edge projects with significant economic potential, embracing the risks that come with them. With their financial firepower and expert advice, they become game-changers for entrepreneurs, opening doors to a world of connections.

2.5 – Crowdequity

Imagine a funding approach that taps into the collective strength of a crowd. Crowdequity does just that. Companies seeking capital launch crowdfunding campaigns, rallying supporters to become stakeholders. These financial adventures unfold on dedicated platforms, uniting the visionaries and backers of tomorrow.

2.6 – Generating cash flows for bootstrapping

Business financing involves harnessing cash flows. Companies can reinvest their operating cash flows for sustainable expansion or bolster their financial reserves to fund increased working capital. Bootstrapping is the strategic approach to self-financed growth, relying solely on internally generated cash flows. This method takes time but avoids reliance on debt leverage.

3 – Financing your business through debt

Debt can be a powerful tool for financing your business. Whether it's traditional lending or innovative solutions, you have a range of options to choose from.

3.1 – Traditional bank loan

The go-to choice for many businesses is a traditional bank loan. However, obtaining a loan, whether short-term or medium-term, can be daunting. Beyond the comprehensive application requirements, including a business plan and financial statements, collateral is often needed to secure the loan.

3.2 – Debt financing from investors or angel investors

Startups can explore debt financing options from investment funds and angel investors, alongside equity investments. Successfully raising debt funding requires proactive planning, months ahead of anticipated financial needs.

3.3 – Crowdlending or P2P lending

Crowdfunding takes various forms. Alongside equity crowdfunding, there's crowdlending, or P2P lending, an alternative debt financing solution where individuals contribute funds directly to businesses. Campaigns are operated through dedicated online platforms, providing direct access to crowd loans.

3.4 – Revenue-based financing (RBF)

RBF is a fast, short-term alternative credit solution gaining momentum across Europe. It offers quick access to funds with minimal paperwork, ideal for fueling growth in various business sectors such as SaaS and e-commerce ventures. RBF maintains equity ownership and repayment is linked to generated revenue.

3.5 – Invoice financing

Invoice financing, also known as receivables financing or factoring, is widely used across Europe. It involves selling or assigning unpaid invoices to a financing company for immediate cash flow. Factors advance funds against the invoice value, deducting a fee for their services.

It's critical to understand that companies employing this financing method cannot selectively assign individual invoices. Moreover, invoice financiers often request credit insurance contracts as an additional requirement.

3.6 – Embedded invoice financing: Cash advances to suppliers

As part of the evolving financing landscape, innovative financial tools are integrated into SaaS companies, IT service providers or marketplaces. These tools provide financing solutions for supplier and vendor invoices. At Aria, we specialise in embedded finance, empowering our clients to swiftly offer advances to their suppliers, eliminating the need to wait for customer payments. Our financing request process is as simple as a single click directly within the integrated platform.

This complete overview decodes a myriad of business financing solutions, each perfectly suited to specific projects and growth stages. Discover Aria’s API-powered instant invoice payment system.