In the complex and interwoven world of corporate finance, securing capital is a constant venture. Whether stakeholders need to fund expansion, bolster working capital, or undertake new projects, the organization is always on the hunt for financing.
As the steward of your organization’s financial strategy, you bear the responsibility of navigating these waters, but given the current financial environment, where debt financing is more costly due to high interest rates, that task is particularly challenging.
With that said, join us as we delve into the following ten capital options for controllers and CFOs, offering a compass to guide you through the complex terrain of financing:
1. Equity Financing
Equity financing involves raising capital by selling shares of the company. It is an appealing strategy, as the company will not accrue interest expenses and has no obligation to repay, and you can also use equity as a tool for recruiting strategic partners.
However, equity financing can dilute ownership, and if you sell off too much equity, primary stakeholders will lose control of the company. Additionally, you will have dividend obligations that must be paid out to shareholders.
2. Debt Financing (Bank Loans)
Traditional bank loans are a good option for small to mid-sized businesses, and going that route allows stakeholders to retain company ownership. However, current interest rates make debt financing quite expensive, and there’s also the mandatory repayment obligation, meaning you are betting on your company’s success.
3. Venture Capital
Savvy investors are always looking for the next big thing, so if your company has a groundbreaking concept and high growth potential, venture capitalists will take an interest. They can provide large amounts of capital and oftentimes, strategic partnerships.
Keep in mind, however, that accepting venture capital funds will dilute ownership and can lead to a loss of operational control.
4. Angel Investors
Angel investors are wealthy individuals willing to invest in your business, often in exchange for equity or convertible debt. These investors offer expertise, mentorship, and industry connections, but you must make sure the angel investor’s vision aligns with the company, especially if they are getting a large equity stake.
5. Trade Credit
If you are in the market for raw materials or finished products but are strapped for cash, trade credits may be a worthwhile option. These are agreements in which suppliers allow you to purchase goods now and pay later.
Using trade credit can boost your cash flow without giving up equity or incurring extra debt, but if you fail to meet the repayment terms, it could strain your relationship with suppliers.
Learn more in A Guide to Trade Credit Insurance.
6. Mezzanine Financing
Mezzanine financing is a hybrid form of debt and equity financing. Under this capital acquisition model, you give the lender the right to convert your debt to equity if you default. Mezzanine loans typically have higher interest rates than traditional loans, but you can often acquire financing without collateral.
7. Asset-Based Financing
These particular loans allow you to borrow money based on your company’s assets, such as accounts receivable or inventory. Asset-based financing is secure, as it’s based on tangible assets, and it might be easier to obtain than traditional loans, but if you default, you will risk losing your assets.
Crowdfunding — raising small amounts of money from a large number of people — has become quite popular among startups, as it is an approach that provides access to capital without validating business ideas or navigating credit checks.
There are a few downsides, however. First, if your idea doesn’t catch on with the masses, you probably won’t raise the desired amount. In addition, crowdfunding platforms generally take a fee, and early contributors expect some sort of return for their investment.
9. Lease Financing
Lease financing is a good option for acquiring additional equipment and vehicles. Leasing conserves cash and provides flexibility in terms of lease duration, but in the long term, leasing might be costlier than purchasing equipment outright.
10. Government Grants and Subsidies
Grants and subsidies don’t have to be paid back. Qualifying for grants and subsidies can also improve your reputation among vendors, investors, and financial institutions. The downside, however, is that grants are often industry-specific and include stringent qualification criteria. You may also have to meet extensive reporting and compliance requirements.
Guidance for Controllers and CFOs
To determine the financing strategy that best aligns with the goals of your business, you should do the following:
- Assess the Need: Define the purpose of the capital so you can determine which financing options are the best fit
- Evaluate the Cost of Capital: Assess the true cost of capital, including interest payments, dilution of ownership, and other fees
- Diversify Sources: Consider diversifying across multiple financing options instead of relying on a single source
- Understand the Terms: Ensure a full understanding of the terms of an agreement, as well as the long-term implications
Apply these tips as you begin to explore financing so you can choose the most pragmatic solution for your business.
Navigating the Capital Landscape
Navigating the capital landscape is a nuanced task, but by understanding and weighing various options, you can chart a course that supports growth while safeguarding the company’s long-term financial health.