Module 09: Financing Strategies (M9-EN)
Angela Ivanova, Wolfgang Kniejski
Successful financing of product development and sales will hereinafter be referred to as Business Financing. Please do not be deterred by this term! It is nothing more than a ‘terminus technicus’ describing content. It goes to the heart of modern-day profitability management and enables all organizations and their stakeholders to pursue their operating goals. Without such financial products as equity financing and debt financing, the global marketplace would experience reduced productivity, and monasteries would find it harder to fund their commercial product activities.
Anyhow, in order to grow your business, it is important to invest in it. This means that you need access to funding sources. Consequently, you have to understand the basics of internal financing, debt financing and equity financing, which will be briefly summarised in the following sub-chapters.
Debt financing is a strategy that involves borrowing money from a lender or investor with the understanding that the full amount will be repaid in the future, usually with interest. In contrast, equity financing, in which investors receive partial ownership in the company in exchange for their funds, does not have to be repaid. In most cases, debt financing does not include any provision for ownership of the organisation (although some types of debt are convertible to stock). Instead, small organisations that employ debt financing accept a direct obligation to repay the funds within a certain period of time.
The interest rate charged on the borrowed funds reflects the level of risk that the lender undertakes by providing the money. For example, a lender might charge a startup company a higher interest rate than it would an organisation of public interest that had shown financial sustainability for several years. Since lenders are paid off before owners in the event of business liquidation, debt financing entails less risk than equity financing and thus usually commands a lower return.
Equity financing is a strategy for obtaining capital that involves selling a partial interest in the organisation to investors. The equity, or ownership position, that investors receive in exchange for their funds usually takes the form of stock in the company. In contrast to debt financing, which includes loans and other forms of credit, equity financing does not involve a direct obligation to repay the funds. Instead, equity investors become part-owners and partners in the business, and thus are able to exercise some degree of control over how it is run.
Since creditors are usually paid before owners in the event of business failure, equity investors accept more risk than debt financiers. As a result, they also expect to earn a higher return on their investment. But because the only way for equity investors to recover their investment is to sell the stock at a higher value later, they are generally committed to furthering the long-term success and profitability of the company. In fact, many equity investors in startup ventures and very young companies also provide managerial assistance to the organisation’s owners and managers.
The objective of this unit is to summarize in an easily understandable and accessible form the various sources of funding that are available via donations, grants and other similar funding instruments, most commonly supported by governments or not-for-profit aid organisations.
A grant is an amount of money to fund certain projects. One may receive a grant for academic, scientic or development work, or to further one’s education or to engage in charity work. Grants are also a key part of many philanthropic foundations' activities.
A charitable donation is a gift made by an individual or an organization, mostly to a non-profit organization, charity or private foundation. Charitable donations are commonly in the form of cash, but they can also take the form of real estate, assets, appreciated securities, clothing and other assets or services.