Posted on: October 28th, 2014
Business Finance is a general term that refers to the raising of capital to finance a capital need of a company. The need for business finance can be triggered by a number of different things including the startup, expansion, acquisition or exit of a company.
Throughout its life cycle, companies have a continuous need for capital, yet the type of capital needed will always vary from stage to stage. When in the early stage, companies have a need for development finance or venture capital.
Venture capital is for companies that have a product but need business finance in order to bring the product to market and to scale their distribution platform. Venture capital is provided by venture capital firms who specialize in certain sectors.
Unlike venture capital, development finance is suited for established companies that are looking to expand their scale through a specific project or capital expansion.
Working Capital and Capital Overview
Once companies pass out of the startup and expansion stage, they need adequate working capital to fund their day to day operations. Working capital finance is a key component of all strong balance sheets as it mitigates the timing risk between collections and payments.
Working capital is technically the difference between a company’s current assets and current liabilities. In the context of business finance, the term refers to the amount of money needed to support the normal working capital level of an operating business.
Capital is generally defined as the excess of asset value over liability value. When bankers analyze a company’s balance sheet, they are very attuned to the level of capital.
This tells them how much money has been retained from earnings or contributed by the owners to capitalize the business. Companies with a strong capital position have strong balance sheets.
Companies with weak capital positons are often overleveraged and more prone to defaulting on a loan.
Capital Market and Funding Platform Overview
At a middle market size where revenues are generally over $20 million, most companies seek capital beyond their local markets. Usually, the business finance needs of the company have outstripped the resources of the owner or the local market.
The next step in the business finance continuum is the capital markets or a funding platform. Capital markets are markets where companies can raise either debt or equity capital.
Capital markets can be private capital markets or they can be public capital markets where companies must register. Middle market sized companies are usually better served by entering the private capital market through utilizing a funding platform.
A funding platform is an efficient way to reach many lenders in a rapid time period. Funding platforms come in all shapes and sizes. In the middle market, lender funding platforms are maintained by firms that have transactional process expertise and strong relationships with many lenders.