How do companies finance their investments?

Why does the company invest in various projects?

Investment is of critical importance to any business. It can be the merchant's initial investment to purchase 

• his business ,
• research and development (R&D) expenditures for investment to finance growth or recruitment in an SME. 

More broadly, the need for business investment is driven by specific needs such as:  

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

In order to monitor the evolution of investments, INSEE conducts a quarterly survey of thousands of companies in the manufacturing sector with over 20 employees. Such a measure allows the evaluation of the different types of investments in France.

Renewal of used facilities

According to the study, French companies invest primarily in the replacement of old equipment or installations . On average, from 2001 to 2020, this investment item will account for 32% of estimated spending. 

Increase in production capacity

Investment to expand production capacity comes in second place with an average of 25% of the companies' expenditure estimates. It evolves in correlation with the country's economic growth and the competitiveness of structures. The decline in economic growth in France is therefore automatically reflected in this type of investment.

Modernization and rationalization of production

Modernization investment, which aims to boost productivity, is the third most important investment for French companies. On average from 2001 to 2020, it represents 22% of total estimated capital expenditure. 

Other investments

Finally, 21 percent of the estimates of investment spending from 2001 to 2020 concern other types ofinvestment , such as improving safety, limiting pollution, etc. The changes in the structure of investment have their roots in the economic situation in France, but also in structural characteristics relating to the ability of companies to innovate.

How to finance an investment?

As we have seen, investments are of crucial importance in a competitive market. Companies have several tools at their disposal to finance their investment needs themselves. 

Self-financing

Self-financing for a company consists in using its own cash flow tofinance 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 in order not to put your balance sheet out of balance.

It refers to all the gross resources available to the company at the end of a financial year, the cash surpluses. Cash flow thus represents the internal financing capacity of a company.

How to calculate your self-financing capacity?

Cash flow can be calculated in two ways:

Cash flow = Gross operating surplus + Cash income - Cash expenses.

The gross operating surplus(GOE) corresponds to the operating resources generated by the company during an accounting period. 

Income received or to be received is income that generates a cash inflow, such as financial income and extraordinary income. 

Disbursed expenses result in an outflow of cash and cause the company to incur expenses, such as taxes or wages.

Cash flow = result for the year + calculated expenses - calculated income + net book value of assets sold - income from the sale of assets.

Net income is the difference between the company's revenues and expenses.

Calculated expenses are all non-cash expenses that do not result in a cash outflow. These are, for example, depreciation expenses or provisions. 

Calculated revenues include all non-cashable revenues. These do not give rise to any cash flow, as they do not represent a cash inflow. This includes, for example, write-backs of depreciation.

Leasing

Leasing allows you to finance 100% of the equipment without making any contribution. Thus, you can invest in equipment, such as a car or a production machine, without resorting to a bank loan. It also differs from traditional bank financing, as the latter is often limited to 70% of the price of the financed good.

Generally, the manufacturer sells its equipment to a leasing company. The latter rents the equipment to the company for a specific period of time. The leasing contracts can include a purchase option, the transfer price of the equipment at the end of the contract is then indicated in the document. The rents are deductible expenses of the taxable profit of the company and allows the company to benefit from a tax advantage.

The assets financed by leasing do not appear on the company's balance sheet, which can have the advantage of limiting the company's apparent indebtedness . In addition, the equipment is replaced free of charge in case of default during the term of the contract. However, it is important to pay attention to the total cost of the lease which can be higher than a traditional bank loan.

How to find external financing to invest?

When the company is unable to finance its own investments, it can turn to external financing solutions.

Strengthen your equity

In order to finance an investment, the company can proceed with the contribution of the partners' or the entrepreneur's own funds . The latter can be done in cash or by abandoning partners ' current accounts to the benefit of the company, with a better fortunes clause allowing to recover the abandoned sums if the company's subsequent situation allows it.
 

It is also possible to call upon the relatives of the entrepreneurs to obtain love money. It generally corresponds to the first recourse for a beginning of financing of creation ofcompany. It is a question of soliciting one's close relations, family and friends to obtain capital in the form of a donation or an increase in capital. Donors benefit from tax reductions and exemptions. This financing is fast and potentially non-dilutive, but requires a wealthy entourage.

Business angels and venture capital

The amount of equity capital that can be raised by entrepreneurs and their relatives is usually very modest. This is why many companies turn to venture capitalists and business angels to raise sufficient capital. 

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. 

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. 

Bank debt

In order to finance an investment, a bank loan has long been the most obvious solution. In order to obtain a loan, however, the partners must make a sufficient equity contribution. This contribution must often represent at least 20% of the global 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. 

Revenue Based Financing

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Karmen is the Revenue Based Financingan innovative form of financing based on companies' future revenues . non-dilutive (there's no transfer of capital in exchange) recommended for startups, SaaS companies, e-commerce and all other types of digital business. 

With Karmen, French companies benefit from a 100% non-dilutive, digitalized, and fast financing solution. Your eligibility for financing is determined in less than 48 hours. Simply connect your read-only accounts to Karmen's algorithm to quickly find out if you are eligible or not. 

The Karmen offer is 100% transparent and has no hidden fees. If eligible, funds are released immediately. To learn more, contact us! 

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Thus, investments are necessary for the company. They allow it to ensure its growth with, among other things, new innovative projects, the modernization of its equipment or the increase of its production capacities. To finance these investments, companies can choose between several solutions. There is a solution to finance digital business investments in a non-dilutive and fast way: Revenue Based Financing is the solution for your company!