Corporate financing without equity gains importance

Corporate financing without equity is becoming increasingly popular. This is primarily due to the new funding instruments available to companies. Alternative financing enables them to access capital outside the usual sources.

Those instruments adapt to different business models and company phases. They are ideally suited for companies without large equity reserves.

Instruments for corporate financing without equity

Whether a company needs debt or equity capital depends on the investment. Different alternative financing options are available for this purpose, for which they have to bring in little or no equity capital. Each has its advantages and disadvantages as well as its use cases.

The most common forms of corporate financing without equity include:

Factoring

With factoring, a company sells its receivables to a factoring provider or factor. The factor pays the company the invoice amount immediately minus a fee. The company does not have to wait weeks or months until cash is available. The capital can be deployed immediately. This improves liquidity. Factoring is particularly suitable for companies with high revenues and long-payment terms.

Types of Factoring

• Full-service factoring or recourse factoring
• Non-recourse factoring
• Open factoring
• Silent factoring
• Due date factoring
• Section factoring
• In-house factoring

Leasing

Companies can lease assets such as machines, equipment, or vehicles instead of buying them. This allows them to free up capital while still gaining access to the needed resources.

Alternative Debt Funding

With alternative debt funding, companies receive financing tailored to their needs, based on their cash flow and business plan. The financing amount and repayment terms can be flexibly designed and adapted to the company's development. This gives companies tailor-made corporate financing without equity and does not dilute their shares. re:cap also offers this type of financing.

Convertible Loans

With a convertible loan, a company receives debt capital from investors who can convert their investment into equity (company shares) at a later date. Convertible loans are particularly popular with startups because existing investors can invest without much effort. The conversion usually takes place at the next equity financing round.

Venture Debt

Venture debt provides credit-financed venture capital. It is designed for growth companies and it is used between two equity funding rounds. Companies receive debt capital through a venture loan. However, venture debt lenders also secure themselves against credit risk with high-interest rates.

Venture Capital

Venture capital is one of the popular financing instruments for startups and growth companies. Early-stage companies receive equity from VC funds and, in return, give them shares in their company. While startups receive large sums of capital when financed with VCs, founders also give up control over their company.

Business Angels

Business angels are private investors who invest in young companies. They bring equity, know-how, and network to the table. Business angels are usually founders or entrepreneurs themselves and are available for advice.

Crowdfunding

Crowdfunding platforms enable companies to raise capital from a large number of supporters. In return for their investment, they usually receive a non-cash reward (e.g., the product built with the funding). In addition to classic crowdfunding, there is also equity-based crowdfunding and crowdlending.

Government Loans

Companies that want to borrow debt capital but do not have the necessary equity and collateral can receive promotional loans from government-backed banks or credit institutions. These offer favorable conditions and repayment options. They are one way to realize corporate financing without equity.

Bootstrapping

In bootstrapping, the company generates its own equity. It means that a company finances itself solely through internal resources and revenue. This often requires a high level of perseverance and discipline but results in the company operating entirely without external capital. Measures for effective bootstrapping can include cost reduction and a strong focus on cash flow.

Conclusion: corporate financing without equity

Corporate financing without equity has gained importance in recent years. Closely associated with this is the emergence of alternative financings. For these, companies typically need to contribute less equity and collateral.

Corporate financing without equity is pursued by companies for various reasons. Startups and growing companies do not yet have sufficient internal funds to finance themselves. Even companies with adequate equity opt for external financings. Typically, the cost of capital for equity is higher than for debt.