samenvatting H3 funding .docx

# External sources of company funding External sources of company funding provide capital beyond the company's internal resources, enabling growth and investment through various financial instruments and partnerships. ### 1.1 Bank financing Bank financing is a common method for companies, especially Small and Medium Enterprises (SMEs) and start-ups, to acquire capital. Banks often require collateral, such as hard assets like real estate or equipment, or guarantees from shareholders to mitigate lending risk. #### 1.1.1 Types of bank loans * **Bank overdraft:** Allows a business to maintain a negative balance in its bank account, essentially a flexible credit line. The bank's willingness to extend this facility depends on its confidence in the business's ability to repay. * **Straight loan:** A short-term loan, typically for less than 12 months, where the principal and interest are repaid together at maturity. * **Bullet loan:** A loan with a maturity exceeding one year. Interest payments are made at regular intervals, with the entire principal repaid at the end of the loan term. * **Term loan:** Loans with maturities typically ranging from 5 to 10 years (or 20-25 years for real estate loans). Both principal and interest are repaid in installments (monthly or quarterly). Mortgages operate on a similar principle. * **Credit line:** Essentially the same as an overdraft facility, offering flexible access to funds. #### 1.1.2 Leasing Leasing is an arrangement where a lessor purchases an asset for the lessee to use in exchange for periodic payments. The lessee benefits from the use of the asset without outright ownership. * **Financial leasing:** A long-term lease where the lessee typically pays a "rent" for 4-5 years, often with no down payment. At the end of the term, the lessee may have the option to purchase the asset. * **Operational leasing:** A short-term lease without a purchase option. ### 1.2 Bills of exchange A bill of exchange is a written agreement, akin to an IOU, used in trading transactions. It typically carries no interest and is a formal instrument for acknowledging debt. ### 1.3 Debt factoring Debt factoring is a service where a financial institution purchases a business's trade receivables (invoices sent to clients that are not yet paid) at a discount. This provides the business with immediate cash flow, usually around 98% of the invoice value, and transfers the responsibility of collecting the debt to the factoring company. The discount represents the fee for this service and the accelerated access to funds. > **Tip:** Factoring is particularly useful for businesses that offer credit terms to their clients, as it helps manage the accumulation of receivables and improves liquidity. ### 1.4 Self-funding (The 3F's) Self-funding, also known as the "3F's" (Founders, Family, and Friends), is a common source of capital in the early stages of a project. This involves founders investing their own money or obtaining funds from close connections. ### 1.5 Crowdfunding Crowdfunding is a method of raising capital by collecting small amounts of money from a large number of people, typically through an internet-based platform. It connects businesses directly with a broad base of potential investors. * **Types:** Crowdfunding can be used to raise both equity and debt (crowdlending). * **Process:** A business presents an investment proposal, and the platform conducts due diligence. If the target amount is reached, the business receives the funds (minus a commission to the platform); otherwise, the money is returned to investors. * **Considerations:** Potential risks include a lack of quick returns, equity dilution, and the absence of a secondary market for the invested shares. * **Funding range:** While companies can raise significant amounts, they often seek between 100,000 and 1,000,000 euros. The average investment per investor is usually small. ### 1.6 Business angels Business angels are wealthy individuals who have prior success in business. Their primary motivation is to achieve a high financial return on their investments. They often provide not only capital but also expertise and access to their networks. * **Investment focus:** Angels typically invest in projects they feel an affinity for and hope to exit within 5 years, seeking returns of 20% or more. * **Investment range:** Individual angel investments often range from 25,000 to 250,000 euros. * **Organization:** Business angels may operate individually or be organized into "clubs," such as the European Association of Business Angels (EBAN). > **Example:** Clubs of business angels regularly organize meetings where entrepreneurs can pitch their business proposals to potential investors. A well-prepared pitch, demonstrating passion, clarity of purpose, market opportunity, and solid financial projections, is crucial. ### 1.7 Private equity and venture capital Private equity (PE) and venture capital (VC) are significant sources of external finance, particularly for companies with high growth potential. * **Private Equity (PE):** Generally focuses on investments in established businesses. * **Venture Capital (VC):** Specifically targets start-up or early-stage businesses with substantial growth prospects. VC is a form of equity financing where capital is invested in exchange for equity, usually a minority stake. Venture capitalists are individuals who make these investments. #### 1.7.1 The venture capital process VCs invest in companies, often in the technology sector, with the expectation that their value will increase significantly over an investment period of 4 to 7 years, allowing for profitable exit through sale. #### 1.7.2 VC in Europe Venture capital activity in Europe is generally less developed than in the USA, with smaller average funding amounts. The European Investment Fund (EIF) plays a role in stimulating innovation and entrepreneurship by investing in VC funds and providing guarantees for bank loans to SMEs. ### 1.8 Government assistance Government bodies can provide financial support through various means: * **Tax incentives:** Reductions in tax liabilities to encourage specific business activities or investments. * **Grants:** Non-repayable funds provided for specific projects or purposes. * **Loans:** Financial assistance provided by government agencies, often with favorable terms. ### 1.9 The funding landscape The "funding landscape" refers to the entire ecosystem of funding sources and the processes involved in obtaining capital. Understanding this landscape is crucial for businesses seeking financial support, as it involves navigating diverse funding types with unique requirements to achieve funding goals. This can take time, so it's important to start the process early. ### 1.10 Key takeaways * A wide array of funding options exists for entrepreneurs and start-ups, including both private and public institutions. * Traditional bank loans remain important, especially for established firms. * Business angels and venture capital are increasingly vital for companies with growth potential. * Europe's position in venture capital funding is improving, though it still lags behind other major economies. * The choice of funding source depends on the size of the capital required, ranging from small, personal investments to large public offerings. --- # Internal sources of company funding Internal sources of company funding represent financial resources generated or managed from within the business itself. ## 2. Internal sources of company funding This section details methods by which a company can secure funds using its own existing financial mechanisms or relationships, rather than relying on external investors or lenders. These sources are crucial for maintaining operational liquidity and managing short-term financial needs. ### 2.1 Bank overdraft facility A bank overdraft, also referred to as an overdraft facility or credit line, allows a business to maintain a negative balance on its bank account up to an agreed-upon limit. This provides flexibility for managing temporary shortfalls in cash flow. * **Mechanism:** The bank grants permission for the account holder to draw more funds than are currently available, essentially creating a short-term loan. * **Bank's Confidence:** The bank's willingness to provide an overdraft is contingent on its confidence in the business's ability to repay the overdrawn amount, including interest. * **Flexibility:** It is a flexible source of finance, as the business can draw and repay funds as needed within the agreed limit. > **Tip:** While convenient for short-term needs, overuse of an overdraft can be expensive due to interest charges and may signal financial instability to the bank. ### 2.2 Bills of exchange A bill of exchange is a written order binding one party (the drawee) to pay a specified sum of money to another party (the payee) on demand or at a predetermined future date. In trading transactions, it serves as a form of IOU. * **Nature:** It is a written agreement that carries no interest. * **Usage:** Primarily used in trading transactions to facilitate payment at a future date. ### 2.3 Debt factoring Debt factoring is a financial service offered by a financial institution (a factor) where the business sells its outstanding accounts receivable (invoices owed by customers) to the factor at a discount. This provides immediate cash flow to the business. * **Process:** 1. A business provides goods or services and issues an invoice to its customer, which is recorded as "receivables" on the balance sheet. 2. The business sells these unpaid invoices to a factoring company. 3. The factoring company purchases the accounts receivable at a discount, typically a small percentage (e.g., 1 to 5 percent) of the invoice value. 4. The factoring company then collects the full amount from the customer. * **Benefits:** * **Immediate Liquidity:** The business receives a significant portion of the invoice value upfront, accelerating cash flow. * **Reduced Administrative Burden:** The factoring company often handles the collection process, saving the business time and resources. * **Risk Mitigation:** Some factoring arrangements include protection against bad debts. * **Discount:** The discount paid to the factoring company represents the cost of receiving cash sooner. For example, if a business sells receivables worth 100 dollars at a 98 percent rate, they receive 98 dollars immediately and pay a 2 dollar discount. > **Example:** A manufacturing company has 50,000 dollars in outstanding invoices due in 30 days. By using a debt factoring service that charges a 2 percent fee, the company can receive 49,000 dollars immediately, allowing them to purchase raw materials sooner. ### 2.4 Leasing Leasing is an arrangement where a company (the lessee) pays periodic payments to a lessor for the use of an asset that the lessor owns. This is typically used for acquiring assets like vehicles, machinery, or equipment without the upfront cost of purchase. * **Mechanism:** The lessor purchases an asset on behalf of the lessee and allows the lessee to use it for a specified period in exchange for regular payments. * **Lessee's Position:** The lessee gains the advantage of using the asset but does not own it. * **Key Features:** * Often requires no down payment, meaning the asset is 100 percent financed. * Payments are made over a fixed term, usually 4 to 5 years. * At the end of the lease term, there may be an option to purchase the asset, but it is not an obligation. Alternatively, the asset is returned to the lessor. * **Types of Leasing:** * **Financial Leasing:** Typically long-term, often with a purchase option at the end. * **Operational Leasing:** Usually short-term, without a purchase option. > **Tip:** Leasing is particularly useful for assets that quickly become obsolete or require frequent upgrades, such as technology equipment. It preserves capital that can be used for other operational needs or investments. --- # Alternative and modern funding landscapes This section explores the diverse and evolving landscape of funding options beyond traditional bank loans, focusing on methods like crowdfunding, business angels, private equity, and venture capital. ### 3.1 Overview of the funding landscape The funding landscape refers to the entire ecosystem of funding sources and the processes involved in securing capital for a project, organization, or venture. Understanding this landscape is critical for individuals seeking financial support, as it requires navigating various funding types with specific requirements to achieve funding goals. While classical bank loans remain significant, particularly for established firms, alternative and modern funding methods are becoming increasingly vital for startups and high-growth potential businesses. ### 3.2 Traditional Bank Financing Bank financing, especially for Small and Medium Enterprises (SMEs) and startups, typically involves various loan structures. However, banks often require collateral, such as real estate or equipment, or guarantees from shareholders, as they prefer to lend against hard assets rather than intangible ones like software or patents. * **Bank Overdraft:** Allows a business to maintain a negative balance on its bank account, subject to the bank's confidence in the business's repayment ability. * **Bills of Exchange:** A written agreement acknowledging a debt, used in trading transactions, which typically carries no interest. * **Debt Factoring:** A service where a financial institution purchases a business's outstanding invoices (trade receivables) at a discount, handling their collection. This provides the business with immediate cash flow. * **Straight Loan:** A short-term loan, usually for less than 12 months, where principal and interest are repaid together at maturity. * **Bullet Loan:** A loan with a maturity longer than 12 months, where interest is paid at regular intervals, and the principal is repaid at the end of the loan term. * **Term Loan:** A loan with a maturity typically ranging from 5 to 10 years (up to 25 years for real estate loans), where principal and interest are repaid in installments (monthly or quarterly). * **Credit Line (Overdraft Facility):** A flexible arrangement providing access to funds up to a certain limit. * **Leasing:** An arrangement for hard assets (e.g., computers, cars, trucks) that allows a business to use an asset in exchange for periodic payments. The lessee (the business) has the use of the asset but not ownership. Financial leasing is long-term with a potential purchase option at the end, while operational leasing is short-term without a purchase option. ### 3.3 Self-Funding and Initial Stages Self-funding, also known as bootstrapping, involves using personal savings or securing loans from founders, family, and friends (the "3Fs"). This is generally feasible only in the early stages of a project. As a company grows, it often needs to seek external financial resources, which may involve ceding some control and requires significant lead time for fundraising. ### 3.4 Crowdfunding Crowdfunding is a method of raising capital by collecting small amounts of money from a large number of people, typically through an internet-based platform. This approach connects businesses directly to a broad pool of potential investors, often referred to as "the crowd." * **Mechanism:** Businesses present a pitch for their investment proposal on a crowdfunding platform. The platform conducts due diligence, and if the proposal is approved, investors contribute funds. * **Funding Types:** Crowdfunding can be used to raise both equity and debt (crowdlending). * **Investor Profile:** The average investment per investor is usually small, though companies can raise substantial amounts, often between 100,000 euros and 1,000,000 euros. * **Process Outcome:** If the target amount is reached, the business receives the funds, minus a commission paid to the platform. If the target is not met, the money is returned to the investors. * **Risks:** Potential risks include equity dilution, the absence of a secondary market for the investment, and the unlikelihood of a quick return. > **Tip:** Thoroughly research and prepare a compelling business plan and pitch when considering crowdfunding, as platforms often have a high rejection rate during due diligence. ### 3.5 Business Angels Business angels are wealthy individuals who have achieved success in business themselves. They provide capital, expertise, and extensive networks to young companies, primarily motivated by achieving the highest possible financial return. * **Investor Profile:** Often former entrepreneurs, business professionals, or senior executives. * **Investment Focus:** They typically invest in projects with which they have an affinity and which have the potential for significant growth. * **Exit Strategy:** Angels usually aim to exit their investment within five years, seeking returns of 20% or more. * **Investment Size:** Individual angel investments can range from approximately 25,000 euros to 250,000 euros. * **Organization:** Angels may invest individually or be organized into "clubs" or associations, such as the European Association of Business Angels (EBAN), which connects numerous organizations and facilitates billions of euros in annual investments across Europe. > **Example:** Finding angel investors can involve leveraging personal networks, social media, or connecting with local angel clubs that organize pitching events for entrepreneurs. ### 3.6 Private Equity and Venture Capital Private equity (PE) and venture capital (VC) are forms of equity financing that invest in small and medium-sized businesses with high growth potential. While often used interchangeably, there are distinctions: * **Private Equity (PE):** Typically focuses on investments in more established businesses. * **Venture Capital (VC):** Primarily targets investments in startups or early-stage businesses, often in the technology sector, carrying a substantial element of risk. VC is technically a subset of PE. Both PE and VC firms invest capital in exchange for equity, usually a minority stake (less than 50%), with the expectation of profiting from the sale of their investment after an exit period of typically four to seven years. Venture capitalists are individuals who make these investments. * **VC Funding in Europe:** Venture capital funding in Europe generally lags behind the United States, resulting in smaller average funding amounts. This has sometimes led entrepreneurs to seek funding in the US. * **European Initiatives:** The European Commission, through instruments like the European Investment Fund (EIF), aims to stimulate innovation and entrepreneurship by investing in VC funds and providing guarantees for bank loans to SMEs, thereby mitigating risk for banks. > **Tip:** Understand the specific focus of a venture capital firm; some specialize in certain industries (e.g., technology) or stages of business development (e.g., seed stage, growth stage). ### 3.7 Conclusion on Funding Sources The modern funding landscape offers a diverse range of options for entrepreneurs and startups, encompassing both private and public institutions and funds. While traditional bank loans remain important for established entities, venture capital and business angels are increasingly crucial for high-growth ventures. Europe's position in the PE/VC market is steadily improving, with a growing capacity to fund ventures from small to large amounts. The choice of funding depends heavily on the stage of the business, its growth potential, and the amount of capital required. --- # Challenges and evolution of funding This section examines the obstacles small businesses encounter in securing finance and provides an overview of the funding ecosystem. ### 4.1 Challenges for small businesses in obtaining finance Gaining access to external finance can present significant obstacles for small and medium-sized enterprises (SMEs), particularly during their early stages of operation. ### 4.2 Evolution of funding sources The landscape of funding has evolved beyond traditional bank loans, incorporating a wider array of options for businesses at different stages of growth. #### 4.2.1 Traditional banking and internal sources * **Bank Loans:** While still a crucial source, banks often require significant guarantees or collateral from SMEs, such as real estate, equipment, inventory, or receivables. Soft assets like patents, advertising campaigns, or staff skills are typically not accepted as collateral. * **Bank Overdraft:** Allows a business to maintain a negative balance on its bank account, provided the bank is confident in the business's repayment ability. * **Bills of Exchange:** A written agreement representing a debt, commonly used in trading transactions, which does not carry interest. * **Debt Factoring:** A service where a financial institution takes over the collection of trade receivables. The factoring company purchases accounts receivable at a discount, providing immediate cash flow to the business. This allows businesses to receive their sales revenue sooner, typically with a delay of 30 or 60 days. * **Straight Loan:** A short-term bullet loan with a maturity of less than 12 months, where principal and interest are repaid together at the end of the term. * **Bullet Loan:** A loan with a maturity greater than one year, where interest is paid at regular intervals and the principal is repaid at the end of the term. * **Term Loan:** Loans with maturities typically ranging from 5 to 10 years (or 20-25 years for real estate loans). Principal and interest are repaid together periodically (monthly or quarterly). A mortgage is an example of this concept. * **Credit Line (Overdraft Facility):** A flexible borrowing arrangement. * **Internal Sources:** Self-funding through founders' own capital, or loans from family and friends, are typically limited to the very early stages of a project. #### 4.2.2 Alternative funding mechanisms As businesses grow beyond their initial stages, they must explore other financial resources, which may involve relinquishing some control over their startup. The process of seeking funding can be time-consuming, emphasizing the need for early planning. * **Leasing:** An arrangement where a lessor purchases an asset and allows the lessee (the company) to use it in exchange for periodic payments. The company gains the benefit of the product without ownership. * **Financial Leasing:** Long-term leasing, often without a down payment, where the asset is fully financed, and there may be an option to purchase the asset at the end of the lease term. * **Operational Leasing:** Short-term leasing, typically without a purchase option. * **Crowdfunding:** Raising capital by collecting small amounts from a large number of individuals through online platforms. It connects businesses directly with a broad pool of potential investors and can be used for both equity and debt financing (crowdlending). * **Process:** A business presents an investment proposal, the platform conducts due diligence (often with a high rejection rate), and if the target amount is reached, the business receives the funds, paying a commission to the platform. If the target is not met, the money is returned to investors. * **Risks:** Can involve high risk, unlikely quick returns, the possibility of equity dilution, and the absence of a secondary market. * **Typical Amounts:** Average investor investment is small (e.g., 100 euros), while companies can raise amounts typically between 100,000 and 1,000,000 euros, with a maximum potential of 5,000,000 euros. * **Business Angels:** Wealthy individuals with prior business success who invest with the primary goal of achieving the highest possible financial return. They often provide not only capital but also expertise and networks. * **Investment Focus:** Typically invest in projects they have an affinity for, hoping for an exit within five years. They seek investments capable of achieving returns of 20% or more. * **Investment Range:** Individual investments are usually between 25,000 and 250,000 euros. * **Networks:** Organizations like EBAN (European Association of Business Angels) facilitate connections, with a significant number of business angels across Europe investing billions of euros annually. Finding angel investors often involves leveraging personal networks or joining angel clubs. * **Private Equity/Venture Capital:** Investment in businesses with high growth potential, typically for a period of 4 to 7 years, with the aim of profiting from the sale of the investment. * **Distinction:** Private equity generally focuses on established businesses, while venture capital targets start-ups or early-stage businesses with substantial growth prospects. The terms are often used interchangeably. * **Venture Capital (VC):** A form of equity financing where capital is invested in exchange for equity, usually a minority stake, in a company poised for significant growth. Venture capitalists invest in early-stage technological projects, demanding a high equity stake. #### 4.2.3 Public and institutional funding * **Government Assistance:** This can include tax incentives, grants, and loans. * **European Investment Fund (EIF):** A key instrument for stimulating innovation and entrepreneurship in European SMEs. The EIF does not invest directly in SMEs but rather invests in existing VC funds or provides guarantees for bank loans, reducing the risk for banks. Despite its role, the EIF's committed capital is relatively small. ### 4.3 The funding landscape The funding landscape encompasses the ecosystem of funding sources and the processes involved in obtaining capital for ventures. Understanding this complex environment, with its diverse funding types and specific requirements, is crucial for anyone seeking financial support. > **Tip:** While traditional bank loans remain important, especially for established firms, business angels and venture capital are increasingly vital for young, high-growth companies. > **Tip:** Europe's position in venture capital funding is steadily improving compared to regions like the USA and China, though average funding amounts are still smaller. > **Tip:** When seeking funding, be clear about your business's purpose, focus on the opportunity, and have a solid business plan with at least five years of financial projections. ### 4.4 Concluding overview of the funding ecosystem A wide variety of funding options are available for entrepreneurs and startups, provided by both private and public institutions. The choice of funding depends on the amount of money required, ranging from private one-on-one deals to public offerings in the stock market. While traditional methods persist, there is growing competition and evolution in how businesses access capital. --- ## Common mistakes to avoid - Review all topics thoroughly before exams - Pay attention to formulas and key definitions - Practice with examples provided in each section - Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Ordinary shares | These represent ownership in a company and typically grant voting rights to the shareholder, with potential for dividends and capital appreciation. | | Preference shares | Shares that offer a fixed dividend payment and a claim of priority over ordinary shareholders in the event of liquidation, but usually without voting rights. | | Bank overdraft | An arrangement that allows a business to withdraw more money from its bank account than is available, up to an agreed limit, enabling it to maintain a negative balance. | | Bill of exchange | A written order binding one party to pay a fixed sum of money to another party on demand or at a predetermined date. It functions as an unconditional order to pay. | | Debt factoring | A financial service where a business sells its accounts receivable (invoices) to a third-party financial institution (a factor) at a discount to receive immediate cash. | | Straight Loan | A short-term loan, typically for less than 12 months, where the principal and interest are repaid together at the end of the loan term. | | Bullet loan | A type of loan where interest is paid at regular intervals, but the entire principal amount is repaid in a single lump sum at the maturity date. | | Term loan | A loan taken for a fixed period, usually between 5 to 10 years (or longer for real estate), where the principal and interest are repaid through regular installments. | | Credit line | An arrangement that provides a flexible amount of funds that a business can draw upon as needed, similar to an overdraft facility. | | Leasing | An arrangement where one party (lessor) allows another party (lessee) to use an asset for a specified period in exchange for regular payments. The lessee does not own the asset. | | Financial leasing | A long-term leasing arrangement where the lessee essentially takes on the risks and rewards of ownership, often with an option to purchase the asset at the end of the term. | | Operational leasing | A short-term leasing arrangement, typically for a period shorter than the asset's economic life, usually without a purchase option at the end. | | Receivables | Amounts owed to a business by customers for goods or services delivered on credit. These are typically recorded as assets on the balance sheet. | | The Funding Landscape | The complete ecosystem of funding sources and the processes involved in acquiring capital for a project, organization, or venture. | | Self-Funding | Capital provided by the founders themselves, or through loans and equity from their immediate network such as family and friends, often used in the early stages of a business. | | Crowdfunding | The practice of funding a project or venture by raising small amounts of money from a large number of people, typically via an internet-based platform. | | Business angels | Wealthy individuals who invest their own money in start-up or early-stage companies, often providing expertise and network connections in addition to capital. | | Private equity | Investment in companies that are not publicly traded, typically involving established businesses with high growth potential, with a medium-term investment horizon. | | Venture capital | A type of private equity financing provided to start-up, early-stage, and sometimes high-growth potential companies. It involves investing capital in exchange for equity. | | European Investment Fund (EIF) | A financial instrument of the European Union aimed at stimulating innovation and entrepreneurship in SMEs by investing in venture capital funds and providing guarantees for bank loans. |