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

Why finance your business?

Financing is crucially 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. Marketing investments are a crucial source of funding for business development.

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

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.

In addition, there are sector-specific investments, for example in the cultural sector, where artwork financing addresses specific issues to support artistic creation, acquisition or valorization within organizations.

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.

As a result, the choice of available financing is sometimes more limited, depending on the size of the company. For example, access to credit is very complicated for start-ups with no convincing track record. Commercial paper is also mainly granted to large companies whose reputation and results are already established.

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 shareholders who are very reluctant to dilute the capital? In this case, management will have more interest in taking on debt. 

Is this a company with a growth financing strategy? growth financing long-term growth financing strategy? Such a company might tend to avoid a public offering on the stock market, which is known for its short-term focus.

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.

To accurately assess a company's financial situation and debt capacity, it can rely on various financial analysis methods, such as the Discounted Cash Flow method, which estimates a company's value based on its future cash flows.

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 linked to the company's financial structure is the cost of financing. Some financing options can be very costly, depending on how the organization has financed itself in the past. But beyond cost, the choice of organization from which to seek financing plays a decisive role in the conditions obtained, the responsiveness, and the support offered.

 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 for financing without dilution is obviously a bank loan, especially a short-term credit for cash flow needs. However, the process of obtaining a loan can be fairly lengthy, and the amounts involved can be quite small. This alternative will require a great deal of energy, as you'll need to convince the banks and almost certainly be turned down. Banks will base their decision primarily on an analysis of your income statement and balance sheet.

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. 

The campaign credit

A seasonal loan is a specific type of short-term loan. It is intended for businesses whose activity is seasonal, allowing them to borrow in advance to cover their cash flow needs during their period of activity.

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.

In addition, inventory-based collateral financing makes it possible to raise funds using inventory as collateral, offering a fast, non-dilutive solution for companies with large inventories.

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. 

Karmen Loan: a flexible, fast solution for financing your growth

We launched Karmen Loan to give ambitious companies like yours access to flexible loans ranging from €30,000 to €5 million, with terms from 1 to 24 months. Our aim? To offer you a simple, fast and personalized alternative for financing your inventory, working capital, marketing campaigns or operational expansion, without the red tape and delays inherent in traditional banks.

Thanks to our expertise and our technology, you benefit from a response within a few hours and tailor-made support. We understand that every project is unique: that's why we tailor our terms to your real needs, so you can seize every market opportunity. Simulate your cash flow with a Karmen loan:

There are therefore a multitude of options for financing your business. The most appropriate choice for financing your business depends on several factors, such as the size of the business, its strategy, and its financial structure. While some financing options involve a reduction in the percentage of capital held by existing shareholders, others are non-dilutive.