Corporate Finance: Resilient Structures, Growth and Crisis Financing
Corporate Finance: Resilient Structures, Growth and Crisis Financing
“A man’s wisdom is not measured by his experiences, but by his ability to gain experience.”
George Bernard Shaw
Irish playwright and politician (1856–1950)
Key Points at a Glance
Corporate finance encompasses the raising of capital, its management, and the control of its use—from startup through growth phases to economic crises. The right combination of equity, debt, and mezzanine capital determines capital costs, liquidity, creditworthiness, and strategic flexibility. A resilient financing structure built during good times is the most effective safeguard against dependencies and bottlenecks.
Read moreWhat Is Corporate Finance? Definition and Basics
Corporate finance refers to the provision, planning, and management of capital needed to sustain and grow a company’s business operations. A distinction is made based on the source of the capital and the legal status of the capital providers:
equity capital comes from the company itself or from shareholders, while debt capital is provided by external lenders at a fixed interest rate. In addition, mezzanine capital can be used as a hybrid form.
An overview of the most important forms of financing
- Internal financing: Self-financing through retained earnings, fixed assets, and/or working capital (particularly inventory and accounts receivable/payable management)—strengthens the equity ratio without external dependence.
- External financing through equity: Equity financing from new shareholders or investors – no repayment obligation, strengthens creditworthiness.
- Debt financing: Bank loans, loans, supplier credit, and grant-backed loans – this approach allows for full control and ownership, but entails interest expenses and repayment obligations.
- Project financing: Earmarked financing for individual projects based on the project’s cash flow.
- Mezzanine financing: Subordinated capital between equity and debt – increases the debt-to-equity ratio less significantly than traditional debt financing.
- Factoring: Selling accounts receivable to specialized financial service providers—improves liquidity without taking out loans from commercial banks.
- Leasing: Using assets in exchange for installment payments—preserves liquidity and equity and keeps credit lines open.
The type of investment determines the term and form of financing: Long-term loans or leases are used for fixed assets, while short-term instruments such as overdraft facilities or factoring are used for current assets.
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Why should corporate financing be a topic of discussion during good economic times?
This question arises because, during good economic times when companies can build up capital reserves, topics such as expansion, investment, and hiring tend to dominate the agenda.
However, in good times, when there is no immediate need to think about financing, there are significantly more options for sensibly structuring corporate financing than during an economic crisis. This is precisely why it makes sense to use such times to optimize the financing structure without time pressure.
Read moreWhat criteria should an ideal financing concept meet?
Low financing costs are certainly an important criterion; however, they are not the only one, and certainly not the most important one.
Flexibility in accessing additional capital is also crucial. The challenge is to resolve a classic conflict of objectives: the goals of “low-cost” and “flexible” clash, as do the goals of “personal” and “alternatives.” This optimization task requires compromises that necessitate prioritization.
In concrete terms, this means: It is always prudent to avoid dependence on a single financing partner.
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Practical Guidelines for a Resilient Financing Structure for Small and Medium-Sized Enterprises
To avoid such a bottleneck, certain preventive measures have proven effective; you can view and utilize these as practical guidelines. Incidentally, this applies not only to established SMEs—small businesses and startups would also be well advised to explore preventive options for securing their financing structure at an early stage.
- Be sure to establish business relationships with at least one additional financial institution so that you have an alternative in the event of a liquidity crisis. Have incoming payments deposited into business accounts at at least two banks, keep your contacts at the banks informed of your company’s plans and financial figures without being asked, and maintain good relationships with your contacts.
- Some companies use factoring as a form of financing. They sell their accounts receivable to a factoring bank in order to significantly shorten their payment terms. If you use factoring, you should do so with an institution that is independent of your primary bank. If you do not separate these two financing activities, your commercial bank—within its corporate group—might, in critical situations, decide to reduce your factoring line or even terminate it to lower its overall risk. This could lead to further underfunding, especially when cash is tight.
- If possible, also separate your checking account operations from your leasing agreements to avoid becoming overly dependent on a single financial institution. If you do end up having to max out your overdraft limit, your primary bank should not be able to immediately terminate your lease agreements—provided, of course, that you continue to pay the agreed-upon lease payments to your leasing provider as stipulated in the contract.
- Set aside an adequate cash reserve from your operating activities in a timely manner, keeping it out of the direct reach of banks. Invest this cash reserve outside your primary bank in a way that allows you to earn some interest income, but above all, ensures you can access it quickly if needed. Only access these reserves held outside your primary bank if your primary bank is unable to provide additional funds and you have exhausted all other opportunities to generate liquidity. In a liquidity crisis, your primary bank will often request financial contributions from shareholders as a prerequisite for extending its credit commitment.
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Growth Financing: Targeting Capital for Expansion
Growth financing is capital specifically allocated for a company’s expansion—particularly when its own cash reserves are insufficient to implement planned growth projects. It enables small and medium-sized enterprises to respond quickly to market changes, new technological developments, or shifts in trends within their industry without being limited to organic growth. Growth financing provides companies with capital to capture market share and accelerate revenue and innovation.
Growth financing is also crucial if your company wants to expand into new geographic regions or market segments. It mobilizes resources to ensure you don’t fall behind in the race for market share and distributes risks so that potential setbacks do not threaten the company’s very existence. Possible instruments include growth capital from new shareholders, equity financing, bank loans with long-term maturities, and public development loans from KfW or state development agencies, which offer favorable interest rates and often include liability exemptions.
Read moreCrisis financing and restructuring financing: fresh cash during a corporate crisis
Is your company clearly heading toward an economic crisis or already in one? Do you urgently need fresh cash to avoid insolvency, and is your primary bank more than hesitant? Right now, it’s especially important to keep a cool head and get creative. Unless your company is already on the brink of insolvency, there are still realistic, short-term solutions available.
Proven measures for crisis financing and restructuring financing
- Receivables management: Collect due and overdue receivables promptly. Sort invoices into undisputed and disputed items and start with the undisputed ones—this is where cash can be mobilized the fastest.
- Shorten payment terms: Instruct the sales department to temporarily agree on shorter payment terms with customers, even in exchange for price concessions. This approach works fastest with customers whose invoices are not yet due.
- Factoring: Contact a factoring provider immediately to sell receivables and convert them into cash quickly. This process takes time—start it as soon as possible.
There are certainly ways to secure liquidity even in the midst of an acute crisis. However, implementing these measures is a dangerous balancing act, especially if your perspective is clouded by the situation. That is why it is advisable to consult financial experts and advisors who understand the mechanisms of this process and are proficient in the tools available.
Very important: Your company is far from having overcome its crisis simply because of the fresh liquidity. You have merely bought your company time to now initiate effective performance-based restructuring measures. As a rule, the true causes of corporate crises run much deeper: The strategy or business model is no longer suitable for operating profitably, structures are no longer appropriate, and/or the company’s capabilities no longer meet market demands.
Our Corporate Finance Consulting Services
The field of corporate finance is complex—in good times and in times of crisis alike. It requires expertise, creativity, innovative ideas, and determination: As experienced consultants, we help you find the right financing solution for your specific circumstances, avoid costly mistakes, and proactively optimize your financing structure. We analyze your financial metrics, identify financing gaps, professionally prepare loan documentation, and negotiate with banks, grant providers, and alternative financing partners as equals.
Together with our partner firms, our consulting services include:
- analysis of the existing financing structure and identification of dependencies and risks
- optimization of the equity-debt structure and liquidity planning
- support in securing growth financing, equity capital, and grant-backed loans
Contact us—your financing is too important to leave to chance
Whether you want to optimize your financing structure during stable times, need start-up capital, are seeking growth capital for the next phase of expansion, or find yourself in a financially strained situation and need to secure liquidity: The choice of the right form of financing should be based on your company’s individual needs and actual financial situation—not on availability or habit. Contact us, and together we’ll explore the right options.
FAQ on Corporate Finance
What is corporate finance?
Corporate finance refers to the totality of all measures for raising, managing, and controlling capital within a company. It encompasses both short-term liquidity management and long-term investment and capital structure planning. A distinction is made based on the source of funds (internal vs. external financing) and the legal status of the capital providers (equity vs. debt).
What to do when banks refuse to provide capital during a corporate crisis?
In critical situations where banks no longer provide fresh capital, financing solutions still exist: Asset-based lenders focus primarily on the market value of operating assets, not on the company’s bottom line. Sale-and-lease-back enables a cash inflow from fixed assets necessary for operations.
Factoring mobilizes receivables. Short-term measures such as shortening customer payment terms or extending supplier credit provide additional breathing room. Professional advice is indispensable during this phase.
Reverse factoring extends payment terms beyond those agreed upon with suppliers.
What is factoring, and for which businesses is it suitable?
In factoring, outstanding receivables are sold to a specialized financing company. The business receives immediate liquidity without having to wait for payments from its customers. This financing option is particularly suitable for small and medium-sized businesses with long payment terms, high volumes of receivables, or seasonal fluctuations in revenue. Important: Factoring should ideally be conducted through an institution that is independent of the company’s primary bank.
What is the difference between equity and debt?
Equity is provided by shareholders or formed from retained earnings. There is no repayment obligation; it strengthens a company’s creditworthiness and provides independence. Debt, on the other hand—bank loans, loans, and subsidized loans—must be repaid with interest. It enables investments without diluting ownership, but entails interest costs and risks. A balanced mix of both financing sources is crucial for small and medium-sized enterprises.
What is growth financing, and when does it become relevant?
Growth financing becomes relevant when a company’s own cash flow is insufficient to finance planned growth projects—such as startup, expansion, internationalization, new products, or production capacity—and to leverage existing growth potential. It enables rapid and effective scaling and helps ensure you don’t fall behind in the race for market share. Such financing options are relevant for various reasons, not just shortly after a company is founded.
Growth financing instruments include bank loans, equity financing from investors, public subsidy loans, and mezzanine capital.
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