With the European economic and monetary union and the introduction of the Euro, a further step in the globalisation of the markets was made. This means more and more growing stress of competition for nearly every company, because trade and entrance barriers have been elimi-nated. On the other side, this also offers more chances for growth and extending the business. Both aspects of course have one in common: capital requirements and especially staying liquid. In critical economic situations it is more than ever important to stay liquid (having enough pos-sibilities to cover the short-term possibilities). That’s the task of financing and planning the finances.
There are two main sources of assessing capital: equity financing and outside or credit capital. It should be a strategic and well calculated decision, what the capital structure of a company should look like. The “leverage effect” plays an important role in this context. But it is often not easy to create this structure like it is wished. There are many factors which influence the “price” and the efforts for getting liquidity out of certain capital sources. One big example therefore is the “Basle 2” decision, which makes it more exertive for companies to gain loans of banks. This can also mean worse conditions of the loans. These circumstances make it inescapable to seek better alternatives – like for example getting equity.
Not only because of tougher times for gaining credit capital, but also because of the continuous intensification of competition, has equity financing become more and more important. One cause for that is the long-term oriented affiliation of equity capital to the firm. There are normally no “stressing” dates when it has to be paid back like is the case with loans from a bank.
This elaboration will give a brief overview about the topic of equity financing. The most important and common possibilities will be presented and evaluated. But we will also have a look at some special forms and more or less unknown facts about this topic.
Table of Contents
1. Introduction
2. General Aspects about Equity Financing
3. Equity financing in context with the legal form
4. Several possibilities in provision of equity
4.1 External Financing
4.1.1 Private Equity
4.1.2 Venture Capital
4.1.3 Going Public
4.1.4 Further Possibilities and Variants
4.1.4.1 Business Angels
4.1.4.2 Trade Sales
4.1.4.3 Industrial Obligations / convertible bonds
4.1.4.4 Tracking Stocks
4.1.4.5 Management Buy Out
4.1.4.6 State Financing
4.2 Internal Financing (Retained Earnings)
4.2.1 Self-Financing
4.2.1.1 Open Self-Financing
4.2.1.2 Financing through Hidden Reserves
4.2.1.3 Financing through accruals
4.2.2 Financing from Depreciation and Amortization
4.2.3 Factoring
5. Valuation of the different Equity Financing Instruments
5.1 External Financing
5.1.1 Private Equity
5.1.2 Venture Capital
5.1.3 Going Public
5.1.4 Further Possibilities and Variants
5.2 Internal Financing
5.2.1 Self-Financing
5.2.2 Financing from Depreciation and Amortization
5.2.3 Factoring
6. Trends and Forecast about getting Equity
Objectives and Topics
The primary objective of this work is to provide a structured overview of equity financing methods in a globalized economic environment. It addresses the challenges companies face in capital procurement, specifically examining how different legal forms and company maturities influence the availability and selection of equity instruments.
- Comparison of internal versus external equity financing sources.
- The impact of company legal structure on capital procurement capability.
- Evaluation of various instruments including private equity, venture capital, and public offerings.
- Analysis of the influence of regulatory environments like "Basle 2" on financing strategies.
Excerpt from the Book
4.1.3 Going Public
Going public, which is equipollent to emitting company shares at a stock market, often means a huge milestone in the development of a company. With this method, the level of “Private Equity” is abandoned. It is a long-lasting and constitutional change of the capital structure which gives the possibility to nearly everybody to become an owner / share-holder of the company (“Public Equity”). This “tool” for getting equity is often used in a late stage of the expansion phase or at the beginning of the maturity phase.
The normal way of going public (also called Initial Public Offer, “IPO”) begins with finding external partners like consultants, accountants, lawyers and representatives of investment banks. Usually the whole procedure is managed as a project with its responsible persons and a certain time frame. At the beginning, a feasibility analysis is inevitable. Besides formal demands like legal obligations, also the market usages and the maturity of the company for an IPO have to be considered. Maturity is depending on management skills, the strategic concept, the efficiency of the organizational structure and the market and innovation potential.
Summary of Chapters
1. Introduction: Discusses the necessity of equity in the context of globalization, increasing competition, and the impact of the "Basle 2" agreement on corporate liquidity.
2. General Aspects about Equity Financing: Explores the relationship between a company's maturity and its financing needs, defining equity as long-term capital that provides security.
3. Equity financing in context with the legal form: Examines how a company's specific legal structure determines its access to capital markets and potential liabilities.
4. Several possibilities in provision of equity: Details the various methods for procuring equity, categorized into external sources (e.g., IPOs, venture capital) and internal sources (e.g., retained earnings, factoring).
5. Valuation of the different Equity Financing Instruments: Evaluates the specific advantages and disadvantages of each financing instrument based on the company's legal status and risk profile.
6. Trends and Forecast about getting Equity: Analyzes future challenges for capital procurement, emphasizing the growing importance of internal financing and robust sales for start-ups.
Keywords
Equity Financing, Internal Financing, External Financing, IPO, Private Equity, Venture Capital, Basle 2, Capital Structure, Liquidity, Business Angels, Management Buy Out, Factoring, Stock Market, Shareholder, Capital Procurement.
Frequently Asked Questions
What is the core focus of this research?
The paper focuses on the diverse methods and instruments available to companies for raising equity, specifically analyzing the distinction between internal and external financing sources in the context of changing global market conditions.
Which specific areas of financing are analyzed?
The research covers both external instruments like private equity, venture capital, and public offerings, as well as internal mechanisms such as retained earnings, depreciation-based financing, and factoring.
What is the ultimate goal of the work?
The goal is to provide a comprehensive overview and evaluation of equity financing instruments, helping readers understand which methods are suitable for companies at different stages of development and with different legal forms.
What methodology does the author apply?
The author employs a structured literature-based approach to categorize and evaluate financing methods, comparing their characteristics, advantages, and risks in the current economic climate.
What does the main body of the work cover?
The main body systematically explores external and internal equity channels, starting from the legal foundations of a company and ending with an evaluation of the performance and suitability of these instruments.
Which keywords best describe this study?
Key terms include Equity Financing, Capital Structure, IPO, Venture Capital, Internal Financing, and corporate liquidity.
How does the "Basle 2" agreement influence equity procurement?
According to the author, "Basle 2" makes it significantly more difficult and expensive for companies to gain loans from banks, thereby increasing the pressure to seek alternative equity-based financing solutions.
Why is the legal form of a company critical for financing?
The legal form dictates whether a company has access to organized stock markets (issuable vs. non-issuable), influences investor risk perception, and determines the fungibility of company shares.
What is the role of a "Business Angel"?
Business Angels act as informal, private providers of risk-bearing capital, playing a vital role for early-stage companies that struggle to secure formal financing.
Is factoring considered an internal or external source here?
The author deliberately classifies factoring as an internal source of financing, arguing that its success is dependent on the company's own ability to create products and generate sales.
- Quote paper
- M.Sc. Thomas Bossert (Author), 2003, Methods of Equity Financing (Eigenkapitalfinanzierung), Munich, GRIN Verlag, https://www.hausarbeiten.de/document/93392
