Sooner or later, any company actively working in the market faces the need to attract external financing. This process is considered quite natural and one should not think that it necessarily indicates the occurrence of financial difficulties at the firm. Rather, on the contrary, attracting financing is an indicator of the company's development and its good prospects.
At which stages may external funding be required
The need to attract external financing can arise at any stage of the company's development. Especially often this happens at the level of start-ups, when the attraction of financing is necessary to implement a new business project and bring it to the market. But this stage is the most difficult for financing, since few investors are ready to believe in an idea alone that is not backed by any material factors.
At the second stage of the company's development, when the business idea has already been embodied in a certain product, and there are economic calculations, the need to attract external financing is also preserved. At the same time, the chances of obtaining an investment substantially increase.
At the third stage, when the company has already created the product and with some success sells it on the market, it will still need additional financing for business development and in most cases it will not be possible without recourse to external capital.
Specific situations when a firm may need external financing are:
- provision of current business needs (financing of working capital, fulfillment of debt obligations);
- expansion (modernization) of existing industries (additional financing of working capital);
- withdrawal of the company from the crisis;
- purchase of other businesses.
Potential investors: who are they?
In order not to be mistaken with the choice of a potential investor, one must understand what purpose he pursues by investing his money in someone else's company. There are several classifications of investors depending on one or another characteristic.
By professional level and correctness of intentions, investors are divided into three groups:
Professionals. These include companies or individuals with special knowledge and the necessary skills in the field of investment decisions, investment management. Such investors make decisions based on clearly formulated investment priorities. The most reliable type of investor.
Non-professionals. These are large or small non-financial companies and individuals who do not have clear criteria for making investment decisions and controlling their effectiveness. Investment is not their professional activity.
"Marauders." Investors with questionable goals. They carry out the redemption of shares through bankruptcy with the further withdrawal of the company's assets.
On investment priorities:
Strategic investors. This group of investors is interested in managing the business, in the sales markets, in the links of production processes - in everything that strengthens their strategic position. They are focused on creating an investment-attractive business for portfolio investors and lending organizations. Such investors prefer to invest in large, successful companies or projects.
Portfolio (financial) investors. First of all, they are interested in the potential for growth in the value of business or shareholdings. The portfolio investor does not directly participate in the management of the enterprise in which he invested, but imposes certain requirements on the business: transparency, the existence of goals and a developed strategy, ensuring the possibility of own withdrawal from the project.
Venture investors. The main difference is the investment of money in projects with a high level of risk, the launch of a new service or product in production. They are interested in small businesses that are able to grow with the infusion of the necessary funds. Cooperation with venture investors can be very beneficial for small companies, since, in addition to money, it can provide the necessary network of contacts, consultations and other assistance.
In relation to risk:
Conservative investors - strive to ensure the reliability of investments by minimizing risks and taking appropriate measures and adhere to proven investment strategies.
Moderate investors - maintain a balance between the reliability and profitability of investments.
Aggressive investors - tend to deal with high levels of investment risk and income, are willing to invest in risky projects at an early stage, but at the same time try to gain control over profits, rights to performance results, etc.
The activity of business angels (venture investors) in many matters resembles cooperation with venture funds. After "promotion" of the project, the investor usually leaves it, reselling shares or share to other investors. This is a profitable business, in some cases capable of increasing the investment by 200% (more than 20% of business angels are official millionaires).
The choice of an investor and obtaining an investment can take a lot of time, since it is necessary to understand well not only the types of investors, but also in the ways and tools to attract additional funds.
Types and instruments of raising additional funds
The choice of a way of attraction of the extra capital depends on many factors: here enters both the size of the company, and prospects of return of the enclosed investments, and availability of actives for maintenance. At present, there are two main groups of methods for attracting borrowed capital. Each of the groups, in turn, contains several basic tools, with the help of which financing is carried out.
Debt capital. In this case, the investor, investing money in the project he likes, is separated from the borrower company. It is assumed that regardless of the result, all invested funds will be returned on the basis of the current contract.
Bank loan. The most common method of lending, involving the issuance of a certain amount by the bank for a certain period and under certain conditions. Depending on the type of loan, it is used by both large and small companies. For example, unsecured loans are very relevant for small businesses, since its representatives often do not have assets to provide. Large companies with a stable financial position and presence of settlement accounts can use a loan, overdraft facility or open a revolving credit line.
Commercial lending. In this case, the attraction of financing is not from banks, but from other legal entities. In practice, it often looks like granting a deferral on payment for the purchased goods. In this case, the seller enterprise is the creditor, and the buyer is the borrower. The types of commercial loans are postponement, prepayment, advance payment or installments. The companies themselves decide on the terms of the loan and the loan rate. This type of lending is widespread in trade.
Factoring. This is a special format for commercial lending, consisting in unsecured provision of funds to the supplier in response to the assignment of a monetary claim for the goods shipped and the service rendered. A factoring company becomes a new owner of the right to claim money for a product. Usually at factoring the supplier receives money faster, than would receive under the contract of delivery from the buyer, thus the factor can immediately pay up to 90% of cost of the goods. The remaining amount comes to the supplier after the buyer confirms the receipt of the goods or makes payment. Like any method of attracting financing, factoring provides for the payment of factor services in the form of a commission. The need for factoring can arise in the company in the event of force majeure, as it often turns out that it is cheaper to increase working capital through various factoring schemes than with short-term loans. This is especially true for small businesses, it is quick to get a loan for representatives of which in some cases it is very difficult. In Russia, factoring is often found in the design of goods and services from small companies to large corporations.
Bank guarantee. This is a document that is a way to ensure the fulfillment of obligations under a contract or contract. At the request of a legal entity (principal), the bank issues a written commitment to pay the customer the required amount in accordance with the guarantee. The guarantee in this case acts as the insurance of the proper execution of the contract by the principal. Otherwise, the bank will collect from him the amount paid to the customer under the guarantee. Typically, the bank guarantee design serves as a guarantee for participants of various tenders and for the conclusion of state contracts, and in addition, it is applied in the B2B area (if the contract prescribes advances) or as a tool for reimbursement of VAT.
For the provision of a bank guarantee, banks charge a fee of 0.2-3% of the amount of the guarantee. In addition, the borrower must pay the bank a commission and a tariff rate for using the guarantee. The size of these payments is affected by the overall financial condition of the borrower, its collateral and a number of other factors. For today, the guarantee commission can reach 5% per annum.
Only those companies whose financial condition will not cause doubts will receive a bank guarantee.
Issue of bonds. Method of attracting external financing, which is an alternative to a bank loan. The advantage of the issue is that the interest rate on the bonds is established by the issuing company itself, and it is usually lower than the interest on the bank loan. As a rule, bonds are issued with a high nominal value and are targeted at large investors. Independently set by the issuer and the maturity of debt on bonds, and they may be limited to a range of potential lenders. Sometimes the issue of bonds allows you to raise more funds than a bank loan. The procedure for issuing is rather complicated. This method of raising funds is suitable only for large companies.
Pledge of assets. This type of fundraising allows companies to implement business projects without diverting them from the turnover of financial resources. As collateral, equipment, real estate, machinery, new transportation, land plots can act. In some cases, the whole business as a whole or profits from commercial activities act as collateral. Usually such a loan is used by developed companies, small firms that do not have solid assets, this method is not always suitable.
Mutual funds. Financing by this type means that the investor receives a portion of the company's profits and certain property rights.
Issue of shares. A very common way to raise funds. It is carried out in accordance with the procedure established by law and is aimed at the issue and placement of new shares in the market. The issue allows attracting significant funds from investors to expand production or finance the organization's current operations if it is conducted correctly and in a favorable period. The advantages of the issue include the absence of the need for regular payments on the loan, as with a loan. But at the same time, part of the company's ownership becomes the property of shareholders who are entitled to influence its activities. Issue of shares, as a rule, large companies in the format of joint-stock companies.
Direct investments. The essence of this method is that the investor acquires immediate property rights, becoming a co-owner of the company. With direct investment, the investor is most likely to be involved in the firm: he does not just invest money and is waiting for profit, he can actively influence the whole business by appointing his representative to the board of directors or participating in him personally. In this case, money, in contrast to portfolio investments, is always invested in real production. With direct investments, the investor becomes the owner of a controlling interest and a significant stake in the company's share capital.
Before making a decision to find an investor, experts recommend that you carefully analyze both your own capabilities and the characteristics of each type of external financing.
Ways to evaluate the attractiveness of your business as an investment object: trust, but check
In order to determine the attractiveness of the company as an investment object, investors have many tools. Of course, when it comes to simple investment options - buying stocks that are resistant to fluctuations in the stock market, real estate, placing funds on a deposit - the question of evaluation is solved quite easily. But when it comes to a full assessment of the business, investors tend to make an in-depth analysis. A large number of approaches to assess the investment attractiveness of the company, we will focus on three: market, accounting and combined.
The market approach is based on the analysis of external information about the firm, but it can be applied only to companies that have placed their shares on the securities market. This approach is usually used by portfolio investors to calculate the return on funds invested in capital.
The accounting approach analyzes the internal information and uses the usual mechanisms for evaluating the analysis of the company's activities. The key indicators in this case are the value of net assets, net profit, company cash flows, economic added value, etc. One of the methods of evaluation in this approach can be an accounting audit of the company, which gives a complete picture of its financial condition. Another method of valuation, widely used by banks, is a due diligence (due diligence assessment), which allows to evaluate in a complex the actual position of the company.
The combined approach combines the evaluation of both external and internal results, so it is as objective as possible from the point of view of the reliability of the evaluation results.
As practice shows, many companies find it difficult to decide on their own how to finance them as much as they can and how likely the consent of investors is to invest in a particular business. In this case, you can use the advice and assistance of specialists.