How to finance your business?

It is essential to evaluate your short, medium and long-term financing needs in advance, throughout the different phases of your company's life, whether at the start-up stage, during the development phase or at cruising speed.

Evaluate your financing needs

Underfunding can have a number of serious consequences for your company, from a "simple" delay in the payment of invoices or in certain investments to the loss of strategic opportunities or the cessation of payments and therefore bankruptcy. 

There are no miracle methods for correctly evaluating your present and future financing needs. However, the application and use of management, monitoring and planning methods and tools adapted to the specific nature, environment and size of your company, on a systematic basis, should make it possible to identify its normal needs (except for exceptional situations).

Among the methods & tools commonly used for this purpose are, on the one hand, traditional analytical and budgetary accounting for everything relating to the analysis of your company's past and present situation and, on the other hand, the creation of financial plans, based on the past (when applicable), but especially focused on future prospects.

The projection exercise will allow you to establish the company's medium- and long-term needs, which are investment needs, and its short-term needs, which are working capital needs.

1. Medium- to long-term needs or investment needs

• These are expenses incurred in order to constitute the sustainable resources required for the company's activity.
• Some examples of investments: certain expenses incurred in the creation of a company, the purchase of land and buildings, their renovation or fitting out, the purchase of furniture or vehicles, the acquisition of a stake in a company's capital, etc.
• Any investments made are recorded on the assets side of the balance sheet as fixed assets (intangible, tangible and financial assets).

2. Short-term needs or working capital needs

• These are expenses related to the company's operating cycle (working capital).
• This mainly involves the management of various forms of inventory (raw materials, work in progress, finished goods, etc.), orders and various forms of receivables and cash flow (in the broadest sense of the term).
• The items concerned are found on the assets side of the balance sheet under current assets.

Determine your financing mix

Your business is usually financed by a combination of different financing sources. The objective is to achieve balanced financing for your company, both in terms of duration (short and medium-long term) and in terms of the origins of the financing (internal and external).

There are three golden rules here:

1. BALANCE THE FINANCING MIX ACCORDING TO THE COMPANY'S LIFE CYCLE

Each phase of the company's life requires a different financing mix. This is particularly true for the pre-activity phase (conception, maturation, testing, etc.), where most or all of the financing needs will have to be met by capital and possibly, for a smaller and specific part, by pre-activity subsidies. Financing this phase by credit remains exceptional because the company does not yet have proof of its solvency or repayment history. These considerations apply even more to innovative projects, particularly if they require a long pre-activity phase and need significant investments, for example in Research & Development. The more history the company has, the more it will be able to prove its repayment ability and therefore be financed by third-party funds (loan, credit, etc.).

2. BALANCE THE FINANCING PERIOD WITH THE INVESTMENT PERIOD

The duration of your financing must be linked to the duration of your investment. Medium- and long-term investments, such as buildings, fittings or machinery, for example, must be financed with permanent capital (equity and loans of more than one year). So it will also make sense to finance the majority of your short-term needs with loans of less than one year, for example.

Calculating the level of working capital is one of the most common methods of assessing the balance between the duration of funding sources and their uses. Working capital is the difference between permanent capital and fixed assets and should normally be zero or positive. If there is a surplus in working capital, this surplus can be used to fund the financing needs of your company's operating cycle. If it is negative, this means that part of the medium- to long-term investments are being financed by short-term assets. In this case, there is a clear imbalance, which may weaken your company, be considered negatively by various third parties (suppliers, customers, banks, etc.), and, in extreme cases, endanger its survival.

3. BALANCE OWN CONTRIBUTIONS AND (external) THIRD-PARTY FUNDS

The most common imbalance is caused by a lack of own financing resources and therefore by excessive recourse to third-party funds. Here again, this imbalance may weaken your company, be considered negatively by various third parties (suppliers, customers, banks, etc.), and, in extreme cases, endanger its survival.  On the other hand, if you have the opportunity to have enough equity to finance everything yourself, full equity financing is not necessarily the most advantageous financing method. This imbalance can also weaken your company, as it would find itself without resources if your own resources were exhausted, for example. In this case, no outside funder may agree to fund you without your own share.

Calculating the solvency ratio (equity/total liabilities) is one of the most common ways of assessing the balance between your company's internal and external financing sources.

Optimise access to financing sources

Once the need for financing has been identified, the appropriate sources determined and their respective weights evaluated, you then need to optimise your chances of success by preparing a presentation/application file adapted to the donors of the requested funds.