What is Corporate Finance?

Corporate finance usually refers to the raising of funds in order to run a business. Unlike asset finance and commercial finance, which refer to a specific form (or group of forms) of funding, corporate finance is a more generic term that encompasses a number of financial activities.

Corporate finance may be raised through methods such as equity financing, debt financing or merchant cash advances. Businesses may look to obtain their corporate finance via a third-party funder or through the sale of shares within the company.

Find out more about the various forms of corporate finance.

Types of corporate finance

Equity financing

Equity financing is one of the most common forms of corporate finance and refers to the method of raising capital via the sale of company shares. The exact nature of this process depends on the form of your company.

For example, a publicly traded company can raise equity by issuing shares to the general public, via the stock exchange. Alternatively, a privately traded company may issue shares to a select group of investors, such as venture capitalists, private equity firms, institutional investors or individual investors.

Equity financing offers access to a larger pool of capital but must be done in a restrained manner. The issuing of too many shares will ultimately result in a dilution of ownership and, potentially, a loss of control for the business’s primary shareholders and existing management.

The overall process of raising equity may also be complex and time consuming compared to other forms of corporate finance.

Debt financing

Debt financing is a blanket term used to cover a range of borrowing methods to raise money. Debt financing covers any agreement in which a business takes out a loan and repays the sum of that loan over a period of time. A traditional commercial loan can therefore be considered a form of debt financing.

Debt financing also covers other such forms of commercial lending, such as bonds or lines of credit.

All forms of debt financing will appear as liabilities on the company’s balance sheet, affecting the company’s leverage and financial ratios.

Merchant cash advances

Merchant cash advances are another form of corporate finance that could be beneficial to businesses that are taking card payments on a regular basis. If your business uses online payment services such as WorldPay, DOJO, PaymentSense or another form of card payment provider, you may have the potential to release funds back into your business.

Find out more about merchant cash advances and how Anglo Scottish can support you.

How does corporate finance work?

The process behind accessing corporate finance will vary from business to business and in line with the preferred method of finance for your needs. A few stages of the process, however, are vital, such as budgeting and working capital management.

Capital budgeting

Though capital budgeting is not actually a method of raising finance, it is a key aspect of the corporate finance process, and one which every business must consider before applying for finance.

Capital budgeting refers to the process of evaluating a business’s major projects and investments to identify their feasibility and value. This process of future planning will reveal which method of corporate finance is best-suited to a given business, as well as the lending terms and arrangements that will provide the largest benefits.

The process of capital budgeting typically includes estimations of cash flow, risk assessments of the future investment, and a number of forecasting methods, such as calculating each method of finance’s payback period, accounting rate of return (ARR) and net present value (NPV).

This vital stage of the corporate finance process helps a business understand the real long- and short-term impacts of whichever form of finance they choose.

Capital financing

Capital financing refers to the actual method of raising finance for a business. These would include equity financing and the various forms of debt financing. Again, this can be achieved in a number of ways.

A balance between equity and debt is vital to the long-term sustainability of a business and the story is the same when it comes to capital financing. Too much debt will increase the risk of failing to meet your repayment plan, while retaining too much equity may dilute your business earnings.

Working capital management

Working capital management refers to the day-to-day management of the company’s cash flow that is used for business operations – another key aspect of the overall corporate finance process.

Close management of a company’s current assets and liabilities helps ensure that the company has sufficient liquidity to meet its short-term obligations and operate efficiently.

Dividends

Dividends are not typically seen as a way of raising funds – this term instead refers to a company decision to distribute a portion of its profits amongst shareholders. However, when utilised correctly, dividends can form a key part of the route to raising further capital.

The issuing of dividends indicates financial health, which looks lucrative to investors and could encourage further external investment in the company. A Dividend Reinvestment Plan (DRIP) also encourages your existing shareholders to reinvest their dividends into additional shares in the company, further showing their faith in the business and enabling you to access further external capital.

How corporate finance can help your business

Corporate finance can help your business access a number of benefits that may not have been previously possible via organic funding. External capital can help your business create and execute rapid growth strategies, while the process of capital budgeting can help manage the risk attached to your business and provide better visibility over your assets and liabilities.

Should you wish to restructure your business financially or carry out a merger or acquisition, external funding may be crucial to help deliver this.

Every business is different, of course, as are circumstances and targets. We recommend discussing your goals with one of our expert advisors to ascertain which forms of corporate finance are best-suited to your business.

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