In doing business, raising funds for new businesses and capital investment is an unavoidable problem for business owners. There are many ways to raise money, but it’s important to choose the one that suits your purpose. Therefore, it would be nice to be able to choose the financing method that suits your business. Therefore, I will explain the types of financing and the advantages and disadvantages.
Table of contents
1. What is financing?
2. Financing method
3. Business growth partner is “Billing Management Robot”
4. Summary
What is funding?
When starting a new business, it may be difficult to prepare funds only with equity capital. Therefore, we raise funds by methods such as “increasing debt,” “increasing capital,” and “cashing existing assets.” Financing involves planning with either short-term or long-term funding.
Of the funds raised, those with a repayment period of less than one year are called short-term funds. Short-term funds include “seasonal funds” that are generated at a specific time, “settlement funds” that are required at the end of the fiscal year, and “bonus payments” that are paid to employees. In addition, “connecting funds” required because there is a difference in the timing of income and expenditure is also one of the short-term funds.
On the other hand, long-term funds are those with a repayment period of one year or more. Long-term funds include “equipment funds” required for real estate and manufacturing equipment, and “ordinary working capital” required for company management such as sales and purchasing. The advantage is that the repayment period is long, but it should be noted that the interest rate will be high.
Here are some of the main ways to raise money. In many cases, funding is done in combination, rather than being biased towards one method.
Increase debt
First of all, I will introduce the advantages, disadvantages, and concrete methods of “increasing assets”.
Merit and demerit
The method of raising funds to increase debt is called “dead finance”. Dead finance is to get a “loan” for a limited time. In order to make a loan, we will repay the interest determined as the principal every month or every year. The advantage of dead finance is that there are many options for lenders to lend. Due to the tax system, it may lead to tax savings. Another advantage is that you can expect a “leverage effect”. Leverage effect refers to the possibility of making a larger profit by borrowing a lot. In other words, if you get a high loan and get it back, the profit margin may increase.
The disadvantage of dead finance is that you have a repayment obligation. Since you have to repay on time regardless of the business situation, repayment becomes a burden when management deteriorates or it is difficult to raise funds. Especially in micro enterprises and venture companies, repayment can be a heavy burden and a pain, and depending on the amount of money, it can also be involved in credit problems. You will also need a guarantor and real estate mortgage to get a loan. Another disadvantage of dead finance is the reduction in future cash flow.
In particular?
Financing methods to increase debt include “public loans,” “bank loans,” “business loans,” “bill discounts,” “corporate bonds,” and “account-backed loans.” Public financing is a financing method that borrows business funds from the national and local governments. Government-affiliated financial institutions include “Japan Finance Corporation” and “The Shoko Chukin Bank”. It also provides a start-up loan to the founder, and it is a feature that people who start a business can also borrow it. Loans from local governments are provided by each prefecture and each municipality. It is common to guarantee that you will use the financial institution that you handle and make a loan.
There is also a “credit guarantee association guaranteed loan” as a public loan. This is a system in which the credit guarantee association guarantees the loan. Banks, etc., which have strict loan screening, do not lend to companies that are at risk of bad debt. However, even companies with low creditworthiness need loans to proceed with their business. Therefore, the Credit Guarantee Association guarantees and will make a substitute payment when it cannot be repaid. After that, the amount returned by the substitute payment will be repaid to the Credit Guarantee Association.
The most used method of dead finance is bank lending. You can only get a loan if an individual or corporation applies for a loan to a bank and passes certain screenings. In most cases, the final loan amount and repayment period are decided by the bank. A bank’s own loan is called “proper loan”. The creditworthiness of the lender is important because proper lending also has a risk of bad debt. Therefore, if you want to get a proper loan, you should have profitability and repayment record. If you do not pass the examination, you can get a loan from the bank by using the “loan guaranteed by the Credit Guarantee Association” included in the public loan.
Business loans are products developed for small and medium-sized enterprises and micro enterprises that could not receive public or bank loans. Not only banks provide business loans, but also non-banks such as consumer finance and business finance. Business loans do not require a guarantor or collateral and are said to be lenient, but they are characterized by high interest rates. In other words, business loans have high interest rates and must be well planned for repayment. Business loans provided by consumer finance are also provided on the same day, so it is an useful method when you need to raise funds immediately.
In some cases, you may be asked to pay for goods and services using “bills” instead of accounts receivable. Often, bills are used in transactions with large companies. If you want to make cash immediately, you can have a financial institution or a specialist buy the bill before the bill is paid. However, it is called a bill discount because it is not the amount that should actually be included after deducting interest and fees. Compared to accounts receivable, bills have the disadvantage that they take longer to pay and cannot be cashed immediately. But if you sell your bills to a bank, you can raise money early. Bill discounts are a type of loan or loan because you are obliged to buy back even if you do not pay.
Corporate bonds are bonds issued by a company for the purpose of raising funds. Not only for institutional investors, but also for individuals such as employees. Even if corporate bonds make a profit, there are no dividends. However, it is a mechanism that guarantees repayment for a limited time, and it is characterized by paying interest when it is time to repay. For companies that want to raise money, they need to promise to repay in a few years, but they have the advantage of being able to raise money from a large number of people as soon as possible. You can set the interest rate high, but you can set it lower than the interest rate when borrowing with a business loan.
Accounts receivable mortgage loan is a loan method that uses accounts receivable as collateral. Accounts receivable can be officially proved to be owned in the form of “assignment registration”. In other words, it is effective as collateral, and financial institutions lend with accounts receivable as collateral. There is also “factoring” to sell accounts receivable, but this is buying and selling. Since accounts receivable-backed loans are loan products, it is important to understand the difference from factoring when using them. ”
Increase capital
The method of “increasing capital” is also effective for raising funds. From now on, I will explain the advantages, disadvantages, and concrete examples of how to increase funds.
Merit and demerit
Increasing capital is called “equity finance” and means “issuing shares”. The advantage of equity finance is that you are not obligated to compensate and do not have to repay even if the value of the stock declines. The collected funds can be used freely. There is no guarantor or collateral like borrowing, and you will strengthen your own funds to stabilize your financial base. However, the management rights of shares change depending on the number of shares held by shareholders. In other words, there is a risk of mergers and acquisitions, so it is a good idea to design your shares well when issuing shares. In addition, even if you are not obliged to repay your investment, you are obliged to pay dividends.
In particular?
Equity financing methods include “new stock issuance,” “venture capital,” “angel,” “stock acquisition rights,” and “crowdfunding.”
Issuing new shares, also known as a third-party allotment, is the issuance of new shares and sale to a third party. The sale amount will be the funds of the company. It is necessary to explain to investors that future growth potential and stock prices will rise, and to have them purchase. In that case, it is a good idea to consider the ratio of investors who do not lose their management rights.
Venture capital is an investment company that invests in venture companies and earns profits while collecting the investment funds. We are investing in promising venture companies in the future, assuming that profits will increase in the future.
Angels refer to individual investors, and in Europe and the United States, wealthy people are actively investing. There is also a “venture company investment promotion tax system”, and when the conditions are met, no tax will be levied on the investment amount. In other words, if you use it well, both the angel side and the venture company side can effectively use the funds.
Stock acquisition rights are called stock options and are a system that allows you to purchase new stock at a preset price. Having a reservation right when the stock price is low gives you an advantage when the company grows. Some companies have introduced stock acquisition rights when hiring employees, and they are being used to increase motivation.
Crowdfunding is a way for a company to create a fund and raise money from individual investors. It is characterized by a high annual rate, and it sets a large return for investors when the business grows. Crowdfunding is characterized by exchanging information on the Internet. Explain the business plan, etc., and those who agree with it will invest. The advantage is that you can raise funds from an unspecified number of people.
Monetize existing assets
You can also raise money by cashing your existing assets. We will introduce the advantages, disadvantages, and specific examples of how to do this.
Merit and demerit
Monetization of assets is called “asset finance”. This is different from the methods of “increasing debt” and “increasing capital”, and is characterized by selling existing assets and monetizing them. In other words, although there will be some reduction in fees, etc., your assets will not change significantly. The advantage of asset finance is that you can raise funds quickly and the cost is low. Asset finance can be used even when the creditworthiness of a company is low. However, asset finance is not available without the assets to be monetized. If you don’t have the creditworthiness of what you want to monetize, trading will be difficult. Also, it would be a disadvantage that the price will be lower than the original value when monetized.
In particular?
Asset finance specifically includes “factoring,” “sales and leaseback, real estate leaseback,” and “debt collection.” Asset finance can be broadly divided into “liquidation of receivables” and “liquidation of assets”. For example, selling receivables whose collection time is earlier and monetizing them at an early stage is the liquidation of receivables. Asset liquidation is a method of selling or leasing unused equipment.
Factoring is a method of selling accounts receivable, which can be immediately monetized after deducting commissions.
Sale & leaseback is to sell real estate, cars, machinery and equipment once, re-lease it and continue to use it. There is a monthly leasing fee, but the proceeds from the sale come in in one lump sum. Therefore, it is an effective method when you need to raise funds immediately. Similarly, for real estate leasebacks, the owner’s home is sold and the home is rented at the same time. You pay the rent as a leasing fee, but it is a way to continue living.
In addition, there are two types of debt collection: “early cashing” and “unpaid collection”. In order to collect the claim before it expires, we may file a payment reminder such as content certification mail, civil mediation, or a small amount litigation.
