How to choose the most suitable financing method for your company?

Why finance your business?

Financing is critically important for any business or project. Whether it's creating a startup or investing in new projects, products or services - all businesses, regardless of size, need financing.

Thus, the financing requirement of a business is theinitial investment to start the business. A merchant needs funds to buy his business, for example. 

It may also coincide with investments necessary for the survival of the company, such as the need for working capital (the funds needed to finance the company's operating cycle).

Finally, the need to finance companies is explained by specific investment needs such as 

• renewal of fixed capital, 
• the modernization of equipment, 
• thedevelopment of new products or services, 
• or theincrease of the production capacity.

What criteria should I use to choose the most suitable financing for my company?

There are different types of financing with different implications and characteristics. The business owner must think about certain criteria in order to choose the one that is best suited to his or her business.

The size, the life cycle of a company

The size and stage of the company seeking financing is an essential criterion. It certainly allows the company manager to make a better choice of financing, but above all it has the effect of eliminating certain harmful options.

The choice of available financing is therefore sometimes more limited depending on the size of the company. For example, access to credit is very complicated for financing start-ups with no convincing track record. 

Another example: grants or crowdfunding are proving to be inadequate or even insufficient for large structures.

The company's strategy

One of the first and most important criteria in the choice of financing is the business strategy and the vision of the founders or shareholders. 

Is it a family business with a shareholder base that is very reluctant to dilute the capital? In this case, the management will have more interest in taking on debt. 

Is it a company with a long-term strategy ? Such a company would perhaps tend to avoid a public offering on the stock market, which is considered to be short term.

The financial constraints of the company

Finally, the company manager must have a good idea of the financial situation of his organization to know which financing solution is the most relevant. While some sectors, such as retail, have a negative WCR, other companies require constant financing of the operational cycle.

There are also rules of equilibrium that must be respected in order to qualify for certain types of financing. These rules correspond, for example, to debt ratios to be respected or a certain repayment capacity to be reached. 

Finally, another constraint related to the financial structure of the company to consider is the cost of financing. Some financing options can be very expensive depending on how the organization has financed itself in the past. 

 For example, a company with a lot of debt will have to pay exorbitant interest rates if it wants to take out a new loan.

List of non-dilutive financings

Self-financing

Self-financing for a company consists of using its own cash flow to finance an investment.  

It allows the company to pay its expenses or to invest, and this, without calling upon financing external to the company. 

However, self-financing has a limit: once consumed for an investment, these funds must be reconstituted so as not to put your balance sheet out of balance.

Bank debt

The first solution to finance yourself without dilution is obviously the bank loan. Nevertheless, the steps to obtain a loan can be quite long and the amounts can remain quite low. This alternative will require a lot of energy, because you will have to convince the banks and most certainly be refused. 

In order to obtain a loan, the partners must make a sufficient equity contribution. This contribution must often represent at least 20% of the total financing. In addition, guarantees will be required by the lending institution.

Subsidies

In France, the State allocates a budget to support business creation. Subsidies can take different forms: material or financial aid, social and tax relief. Several public or private organizations provide subsidies for business creation. 

Honorary loans

The loan of honor, non-dilutive and at zero rate, is a regional loan with a ceiling of 90 000 €. The recipient commits on his honor to repay the loan 3 to 5 years after receipt. 

Crowdfunding

Some platforms such as Ulule or Hello Asso offer participatory financing based on a system of collecting donations or loans. 

Love money

It is a question of soliciting one's close friends and family to obtain capital in the form of a donation. Donors benefit from tax reductions and exemptions. This financing is fast and potentially non-dilutive, but requires a wealthy entourage.

List of dilutive financing

Dilution occurs whena company issues new shares that result in a decrease in the percentage ownership of existing shareholders in that company. Share dilution can also occur when holders of stock options, such as employees of the company, or holders of other option securities exercise their options. There are several types of dilutive financings, all of which involve an equity investment by the investor.

Business Angels

Many companies turn to business angels to obtain initial financing for the creation or start-up of a business. A Business Angel is an individual who invests his or her personal funds in a company. 

They are generally former entrepreneurs who, although they have fewer resources than a venture capital company, provide sound advice and valuable contacts from their address books. They invest in a high-potential company in exchange for a share of the capital and hope to obtain a return on investment (ROI).

Venture capital

Venture capitalists are private investors who invest their capital in start-ups or young companies with high potential in exchange for shares in the company for a defined period. 

These investors bring both their financial contributions and their assistance in the management and development of the company through their expertise and contacts. The objective of these investors is to realize a capital gain in the sale of the shares within 5 years. 

What is the most suitable financing for companies with recurring revenues?

Revenue Based Financing

Revenue Based Financing is a new financing scheme based on the company's future revenues . It allows companies with recurring revenues to finance their growth in a non-dilutive and very fast way.

It is a way for companies to raise capital by promising a percentage of future revenues in exchange for the money invested. It is a good alternative to fundraising.

In Revenue Based Financing, the investor has no direct ownership in the company and does not require fixed payments. In fact, the amounts given to the investor will be proportional to the company's performance. Specifically, if your sales drop during a certain month, your royalties will be reduced. Conversely, if your sales increase the following month, the amounts to be given will increase in the same way.

This alternative to fundraising also has the advantage of being accessible to multiple companies. It does not require profitability criteria, exponential growth forecasts or the marketing of ultra-innovative products. 

Karmen is a non-dilutive funding solution that helps digital businesses access instant growth capital. Instead of waiting for online or subscription revenues to be collected month after month, Karmen unlocks the annual value of those revenues, up front. Karmen's solution allows digital businesses to access instant growth capital, within 48 hours, to fund their growth expenses (customer acquisition, marketing, recruiting, technology and more).

With Karmen, French companies benefit from a 100% non-dilutive, digitalized, and fast financing solution. Your eligibility for financing is determined in less than a few hours. If you are eligible, funds are released immediately. For more information, contact us! 

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Thus, there are a multitude of possibilities to finance one's business. The most appropriate choice to finance your company depends on several factors such as the size of the company, its strategy and its financial structure. While some financings imply a decrease in the percentage of capital held by the historical shareholders, others are non-dilutive. There is a solution for non-dilutive and rapid financing of companies with recurring revenues: Revenue Based Financing is the solution for your company!