What Is Corporate Finance

With successful start-ups, the customer base grows and new products complement the offer. With increasing sales, the capital required to hire new employees or move into larger business premises increases. Established companies also need fresh capital to expand. To this end, the companies have various financial means at their disposal to increase liquidity and to finance the expansion.

What is Corporate Finance?

Equity and debt for corporate finance

Companies can use their own or third-party capital for financing. The shareholders provide equity through their deposits. Bank balances, real estate, and securities are also part of the company’s own financial resources.

If a company uses debt to finance sales, it can be internal or external. In the case of internal financing, the management reinvests profits or creates provisions. The external financing is done by bank loans and other investments by third parties that the company with interest back pay the must. There are also special forms that represent a mixture of equity and debt. These special forms include leasing, factoring and forfeiting.

Types of corporate finance

These financial instruments are used by companies to increase liquidity :

  • Bank loan
  • leasing
  • Factoring
  • Guarantees
  • Equity capital
  • Promotional loan
  • Corporate bonds and promissory note loans
  • Crowdfunding

High demands on a bank loan

The most common form of corporate finance is the bank credit. When applying, however, more and more companies find that the requirements of credit institutions for borrowers have increased. This is mainly due to the rules according to Basel III. This means Europe-wide regulations of the Bank for International Settlements (BIS), which were adopted by credit institutions to improve the equity ratio. Higher equity should enable banks to bear losses themselves and not use public funds in the event of a financial crisis.

Basel III has a direct impact on corporate lending. The regulations force banks not to lend too much and to check borrowers more closely. The review of the loan application by the bank, therefore, takes longer and commercial borrowers have to meet increased requirements. The credit institution checks the company’s creditworthiness, equity ratio, sales, and tax payments. To do this, numerous documents must be submitted and negotiations on the bank loan can take several weeks. Therefore, financing through a bank is generally not suitable for short-term corporate financing.