Last modified:Thursday 31 October 2019
Generally speaking, your company is financed by a combination of different sources of financing. You are recommended to obtain balanced financing for your company. This balance must be achieved both in terms of duration (short and medium to long-term) and in terms of source of resources (internal and external).
There are, therefore, three basic rules:
a) A different financial mix is recommended for each phase in the life of your company
This is especially true for the pre-activity phase (design, maturation, testing, etc.) for a new company project. During this phase, most or all financing needs must be met by the capital and possibly, for a smaller and more specific portion, by pre-activity subsidies. The financing of this stage by credit is rare. These rules are particularly relevant to innovative projects, and even more relevant to those requiring a long pre-activity phase and significant investment needs: for example, in research and development.
b) The duration of your financing must be linked to the duration of your investment
It is highly recommended to finance your medium and long-term investments, such as buildings, development works or machines, using permanent capital (own funds and long-term credit). The duration of any credit must also correspond to the economic life of the investment as far as possible.
Similarly, it is more logical to finance most of your short-term needs with credit lasting for less than one year.
The calculation of the level of working capital is one of the most common methods of calculating the balance between the duration of the sources of financing and that of their uses. The working capital, or the difference between the permanent capital and the immovable assets, must normally be zero or positive and, in case of surplus, must finance a portion of the financing needs linked to your business' operating cycle. Otherwise, this means that a portion of the medium to long-term investments are financed through short-term credits. In such a case, there is a clear imbalance, likely not only to be viewed negatively by various third parties (suppliers, customers, banks, etc.), but also to weaken your company and, in extreme cases, place its survival in danger.
c) It is important to find a balance between own funds and third-party funds.
The most common imbalance is caused by a lack of own financing resources and excessive recourse to third-party finds. Again, this imbalance is likely not only to be viewed negatively by various third parties (suppliers, customers, banks, etc.), but also to weaken your company and, in extreme cases, place its survival in danger.
On the other hand, know that even if you have the opportunity to use enough of your own funds to finance everything yourself, doing so is not necessarily the best financing method.
More importantly, you need to be aware that this may also constitute an imbalance likely to weaken your company, notably in case of the exhaustion of your personal resources. In such a case, it may be that no financial backer will agree to finance you without an effort on your part.
The calculation of the level of solvability is one of the most common methods of calculating the balance between your company's internal and external sources of financing.
Optimising access to sources of financing
Once the sources of financing are known, the level of financing needed, the most suitable sources of financing and their respective weights assessed, all that remains is to access these sources of financing and, more specifically, capital and credits.
In this respect, it is essential to optimise your chances of success, and thus to prepare a presentation/application file adapted to the approached financial backer.