There are various options for raising capital depending on which lifecycle phase the company is in.
In the establishment phase it is recommended to use equity capital because it is used as risk capital. Interest and repayments accrue on bank loans irrespective of the success of the company. For this reason it is advisable to use bank loans for advance financing of secure cash flows only.
Paid-in and acquired equity capital
Equity capital refers to funds contributed to a company by one or more (co-) owners. Contribution can be made in the form of cash, savings deposits or non-cash contributions or in the form of own work contributions. Equity capital also includes profits which flow back into the company for the purpose of internal financing. As a rule, equity capital is reported on the liability side of the balance sheet. It entitles the persons concerned to receive company profit, obliges them, however, to bear losses. Furthermore, it generally grants the contributors at least the right to provide input for company decisions.
IPO, short for Initial Public Offering (formerly also called "Going Public"), is the first offering of shares of a company on the organized capital market. The transaction is normally executed by one or more banks.
One of the most important motives for an IPO is to supply the company with new funding by issuing shares. It can also provide existing shareholders the opportunity to sell their shares in the company at a better price than what is possible for shares in a company that is not listed on the stock exchange. Company succession and spin-offs can also be governed through an IPO. Other reasons include covering the need for equity capital due to growth, improving borrowing costs by raising the credit rating, increasing awareness of the company or the attractiveness for employees and managers and increasing the company's competitiveness. In general, there is a combination of reasons behind the IPO.
Mezzanine financing as a collective term describes types of financing which in their legal and commercial structure represent a hybrid of equity and debt financing. Traditionally, a company is supplied with equity capital commercially and/or on the balance sheet without the company issuing the lenders with voting or management rights or with the residual claims the actual partners have. Mezzanine capital can be given in the form of equity-like instruments (referred to as Equity Mezzanine) such as participation rights, dividend-right certificates or silent partnerships. Convertible and warrant bonds are also possible. By contrast, Mezzanine capital granted in the form of subordinate, profit-participating loans or partner loans is of a debt nature and as a rule must be reported as a liability on the balance sheet (referred to as Debt Mezzanine). Traditional lenders normally assign the mezzanine to equity capital as the potentially available collateral is not reduced, making it possible to increase the credit line after the mezzanine capital has been supplied, which in turn allows for more favorable mixed financing.
The term Private Equity originally comes from the US. It is capital supplied to the borrower from private or institutional investors in the form of equity capital or equity-like funds. Collateral is not provided. The borrowers are primarily small and medium-sized companies. In general, the capital is made available for a limited time period of three to ten years. In addition to financial components, private equity also includes advisory and relationship management services. The scope of know-how provided is dependent on investors' general offer and on the development status of the company borrowing capital.
The term Venture Capital originated in the US and refers to the provision of liable equity capital or equity-like funds. The capital is provided for a limited time which is normally a contractually agreed time period of three to ten years. However, it is largely unnecessary for the borrower to provide collateral. The provision of Venture Capital is predominately made dependent on the growth opportunities of the company and the resulting return. Venture Capital is used to finance a company in its initial and growth stages as well as for special financing reasons.
In addition to financial components, Venture Capital also includes advisory and relationship management services. The scope of these services is dependent on the development stage and needs profile of the company borrowing capital.
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