Companies striving for growth or investments often need to supplement their own capital and internal financing with external capital, equity financing, or both. To put it simply, external capital is a loan and equity financing is an investment from the financier.
There are many ways to finance growth and investments. When a company is choosing a financing form, the most important criteria are availability of financing, duration of financing needs, financing cost, and the possibility for additional repayments during the loan term, for example.
Bank loan
The most common way to promote growth and source of external income is a loan taken from your own bank, which your company will have to pay back as according to agreed loan terms and conditions and the repayment plan. The bank will assess your company’s financial situation, repayment capacity, and prospects and will also require collateral from your company before granting a loan.
Real securities, i.e. property worth money, which is pledged as collateral for the loan, is an acceptable form of collateral. Acceptable collateral therefore includes business and industrial properties, your company’s moveable property, working machines, your own home, your holiday home, or investment assets.
You can also use guarantee as a form of collateral. In this case, the guarantor might be an entrepreneur or another person with a satisfactory credit rating who will commit to pay the loan if the company is unable to do so. Finnvera can also serve as the guarantor of the loan. When you receive the loan decision, the bank will help you to apply for Finnvera’s guarantee.
Read more about corporate loans and leave a financing application
Credit Facility
A credit facility is a solution for corporate working capital needs and for financing short-term investments. A credit facility is suitable for managing seasonal fluctuation, for example. To be eligible for a credit facility, your company must have a stable cash flow, capability to pay the loan, as well as collateral.
A credit facility involves a temporary agreement between a bank and a company, where the use, terms and conditions, and sum of the credit facility are agreed on. A company can withdraw loans according to their needs within the framework of this agreement. When the customer pays credit back to the bank, a corresponding amount of credit becomes available again.
Read more about credit facilities
Corporate account with credit facility
Interest-bearing credit can be attached to a corporate account. It will provide working capital for your company to meet short-term and seasonal financing needs. Companies may use credit on the account up to the agreed maximum. The cash flow into the account will reduce the credit balance used by your company. The price of the credit is comprised of the reference interest rate, margins, and a credit facility commission, which are determined when agreeing on the credit facility. You will pay interest from your outstanding balance.
Learn more about corporate accounts with credit facility
Hire purchase
Hire purchase is a form of financing which you can use to acquire property for your company, such as a computer or a car. In hire purchase agreements, the acquisition also serves as the main collateral. Your company will pay the price of the purchased product to the seller within pre-agreed instalments, usually on a monthly basis. When purchasing something with hire purchase, you might have to pay the first instalment, i.e., the down payment, before you receive the product. Your company will receive the product immediately as well as the title to the asset for accounting purposes. The product will finally become your company’s property when the last instalment has been paid.
Leasing
Leasing is the long-term rent of a lease asset which facilitates corporate investing. Leasing does not tie up your company’s capital and the leased property serves as collateral for the financing. Companies can use leasing to finance moveable capital assets, such as vehicles, office and store equipment, tools, and manufacturing equipment. Leasing also enables the modernisation of capital assets to newer and more efficient devices at regular intervals.
The way leasing works in practice is that the lessor, such as an OP cooperative bank, purchases the lease asset from the seller chosen by your company with the terms and conditions agreed by your company and the seller and leases it to your company for a set period of time, which is usually 2–5 years. The customer pays rent to the bank monthly until the end of the lease. Then, depending on the leasing solution, the company may return the leased asset, continue the lease agreement, redeem the asset for themselves, or resell it.
Factoring
Factoring makes the management of your company’s working capital more efficient. The company will receive the capital tied to the invoices regardless of the due date of the invoice immediately after the items have been delivered to the customer. The factoring service package also includes credit control, accounts ledger management, reporting, and a credit insurance service that secures your company against the buyer defaulting, for example.
Public sector loans, guarantees, and subsidies
Various actors in the public sector wish to enable sustainable growth, investments, and internationalisation for domestic companies through financing, guarantees, and support. The public sector actor is usually backed by funding granted by the European Union or the Finnish government. Public sector financers include local action groups, Business Finland, ELY centres, and Finnvera.
A loan granted by an actor in the public sector must be paid back in full and with interest. The guarantee is subject to charge for companies, but enables receiving loan from one’s own bank. Support is a form of financing that is available in addition to self-financing and which does not have to be paid back.
Equity financing
Equity financing is an investment and is counted towards the limited liability company’s equity, as its name implies. The most used method of gathering equity financing is rights issue, where financing is sought from existing or new shareholders.
Other equity financing alternatives include options, convertible bonds, and increasing share capital. Options entitle the recipient of the right to exercise an option, which is usually the company’s management, to subscribe the company’s shares on a pre-determined date and for a pre-determined price if the terms and conditions agreed on the option are met. Convertible bonds include conversion rights to the company’s shares. Convertible bonds seldom include collateral and they usually have a fixed interest rate. Convertible bonds are typically repaid on a lump-sum basis. Convertible bonds are used in particular during a company’s growth stage. Increasing share capital without the issuance of new shares occurs when the shareholders invest into the company in proportion to ownership.
Financing acquired from venture capital investors is also equity financing. Venture capital investors are also colloquially known as business angels or angel investors, who are experienced in entrepreneurship through their own company, which they have typically already sold. To receive an injection of capital, the owners of a company have to be prepared to give a share of the company to the venture capitalist as payment for the financing and risks involved. Injection of capital does not involve collateral. Active venture capital investors add expertise and networking to a company’s management along with their investment. Passive venture capital investors primarily provide companies with monetary capital. The venture capital investors will receive their compensation when the company succeeds and its value increases.
Jere Hakala, Executive Vice President of OP Etelä-Pirkanmaa, was interviewed for the article.