How to raise funds to start a company ?

« It is always more difficult to raise funds than you think. And it always takes longer than expected. Therefore, you need to plan this. », Richard Harroch, investor and Managing Director of VantagePoint Capital Partners. This quote shows us how complicated it can be to find financing for a company and delay entrepreneurs in their projects. Today we will examine the means available for companies to finance themselves, how to choose the right financing method and the problems associated with it. 

First of all, it is quite well known that companies can finance themselves through the bank by taking on debt, thus increasing the company's liabilities. Here, the cost of capital is therefore planned in advance, and is equal to the interest rate paid on loans by the company to the bank. The bank is a debt supplier here. However, one of the main problems with bank financing is that the bank must be able to validate the project and ensure that the credit is repaid by the company concerned. Taking the example of France, 90% of investment credit applications granted to small and medium-sized companies in 2016 according to the French Banking Federation. However, despite these advantageous statistics, these figures only take into account the requests processed by the banks, while many requests are excluded from the first contact with the banker and are therefore not taken into account. In addition, the bank regularly asks SME managers to guarantee their own assets, as they have no guarantee that the loan will be repaid. 

At first, I thought that this situation was a total brake on investment and the development of new businesses, but on the other hand, banks cannot afford to lend large sums of money without having any collateral and therefore involving a significant risk of default.

To solve this problem, entrepreneurs in need of financing have another main means of obtaining the necessary cash: equity participation or the sale of a part of the company to investors. This method of financing may seem more advantageous to the company in the short term since it does not have any real “debt". However, in exchange for this shareholding, it pays dividends, which cannot be quantified in advance. These dividends are called” cost of capital" and indeed, they fluctuate according to the profitability of the company. The latter must reimburse the shareholders taking into account the risk taken and the opportunity cost (it cannot invest the same money elsewhere and must therefore obtain a return at least equal to that which it could have obtained by investing elsewhere). This method of financing may therefore seem more interesting, but it involves dividends to be paid in the long term, without any real deadline as might be the case with bank financing. Moreover, with the presence of corporate taxes in particular, the cost of debt is less expensive than the cost of capital. The two solutions therefore seemed to me to have their own advantages and shortcomings.

Finally, it seemed important to me to mention the weighted average cost of capital (WACC). If a company chooses to finance itself through the two previous means (debt and equity), it is important to take this into account. It is an indicator for estimating the cost of debt and capital, and therefore also the average profitability expected by investors. It is appropriate for a company to keep the WACC as low as possible, since its increase reflects an increase in the weighted average cost, thus an increase in risk and a decrease in the valuation of a company.

In conclusion, financing your business is one of the first steps in the creation process, but it is far from being the easiest to pass. Therefore, I think that to choose the right financing method, you need to have a long-term vision that takes into account the company's business model. However, other forms of financing have begun to emerge in recent years, including crowdfunding (participatory financing on the Internet) and corporate ventures (capital funds supported by major listed groups). Thus, we may have to use these alternative forms of financing to the detriment of traditional forms of financing, which are sometimes difficult to access.