Stack financing: something for you?

Corporate finance has changed tremendously in recent years. Where previously a company was financed by the business owner itself (equity capital) or through a bank (debt capital), there are now numerous ways of financing a business. Consequently, many business owners today choose - voluntarily or out of necessity - to combine different forms of financing. This so-called "stacking" of different forms is called step financing.

An example of stacked financing: company X - which has a current account credit with a bank - has two shareholders who both make a capital contribution to strengthen equity. In addition, a private investor provides a money loan to make investments, the vehicle fleet is leased, and accounts receivable are invoiced by a factoring company.

In this article, I will elaborate on the forms of financing mentioned above (and some other common forms of financing). These forms of financing can all be used in the context of step financing. Then I will mention some of the advantages of stack financing and conclude with a conclusion.

Also watch my video in which I briefly explain in almost 60 seconds exactly what the concept of stack financing is.

Capital Financing

You can choose to take shares when forming a company. The advantage of this is that you benefit from the value development of the company. The disadvantage is that you will lose your investment if the company is declared bankrupt.

You can also choose - for example, if you already own 100% of the shares in a company - to strengthen the company's equity by making a cash deposit. This amount is called a share premium payment. Again, you will lose your investment in case of bankruptcy.

In both cases - that is, by acquiring shares when a company is incorporated or by making a share premium payment afterwards - you strengthen the company's equity. This is not the case if you, as a shareholder, lend money to the company. In this case there is in fact a provision of loan capital. When providing loan capital, you do not benefit from the value development of the company, but receive a (fixed) interest rate periodically. At the end of the term, you receive your loan back.

Not only shareholders can make a money loan. Third parties such as private investors, business angels and/or (other) venture capitalists can also do so. An advantage of such financiers is that they generally provide knowledge and expertise - in addition to money. Often, by the way, these parties also want shares in order to benefit from any increase in the value of the company as well as to gain some control (via voting rights).

Finally, debt capital can also be raised by several parties together. This is the case with crowdfunding, for example, which also spreads the risk for the financiers.

In short, there are many possibilities whereby the aforementioned forms of financing all have in common that capital is provided (in the form of equity or debt). These forms of financing are therefore called capital financing.

Object Financing

You can also choose to finance specific assets rather than the business as a whole. This is called object financing (or asset financing). The best-known forms of object financing are factoring and leasing.

Factoring is a collective name for several services that all have in common that a so-called factoring company collects the business owner 's receivables from its customers. In factoring, receivables from customers or debtors are thus financed. It may be agreed that additional services are also provided by the factoring company, such as carrying out debtor administration or taking over the bankruptcy risk.

In leasing, receivables are not financed, but (as a rule) operating assets or vehicles: a lessor gives an object in use to the lessee for a certain period, for which the lessee pays a fee to the lessor.

There are two main forms: financial lease and operating lease. With financial lease, the lessee becomes the owner of the object at the end of the contract (sometimes after exercising a purchase option), while with operating lease, the object returns to the lessor after the end of the term. Thus, with financial leasing the financing of the object is central and the economic risk lies with the lessor, while with operating lease the use of the object is central and the economic risk lies with the lessee.

As I wrote in the introduction, all kinds of financing - debt and/or equity, equity financing and/or object financing - can be combined. So what are the advantages of this?

Benefits of stack financing

Advantage 1: customization

The example cited in the introduction to this article illustrates that through step financing, customization is possible: after all, the business owner chooses the financing that best suits its business at the time. After all, a construction company in dire straits needs different financing than a large dental practice that is doing well. This customization is a primary advantage of step financing.

Benefit 2: flexibility

Staggered financing offers business owner a high(er) degree of flexibility. For example, you can choose, for reasons of your own, to buy part of your fleet and to lease part of it, opting for a long or short term. This situation is significantly more flexible than the situation in which your main bank provides one loan with which you buy your entire fleet and to which, moreover, you are in principle tied until the end of the term.

Benefit 3: less dependence

A third advantage of combining different forms of financing is that financier and business owner are less dependent on each other. After all, there is no longer one financier who finances the entire company, but several financiers who all finance a part or a different object. This reduces mutual dependence. If, for whatever reason, things do not work out between the financier and business owner, it is easier to say goodbye to each other.

Benefit 4: Greater likelihood of funding

A fourth advantage is that by combining different forms of financing, a business owner has a greater(er) chance of receiving funding. For example, banks are reluctant to finance a start-up without a track record. Crowdfunding - in which several parties finance the required amount - can then offer a solution because it spreads the risk over several financiers. With so many alternatives and the use of stacked financing, more companies can be financed today. This is not only good for business owners, but also for the business climate and society as a whole.

Benefit 5: higher funding

A fifth advantage of step financing is that one financier who finances the entire company generally takes less risk than several financiers who each finance a part. This means that more - read a higher amount - can be financed than in the past.

Conclusion

There are, in my opinion - if applied in the right way - mainly advantages to step financing. In my view, everyone benefits from the optimal use of step financing: the financier, the business owner and society as a whole.

Which combination of financing options is best for you depends on many factors. Are you business owner? Are you a financier? What type of business is involved? What are you pursuing with the financing? Are there other financiers? Do these financiers have collateral? If so, what securities? Etc.

In short, it is important to get good advice beforehand so that the business is (stapel)financed in the best and most profitable way.