What companies need money for

In the popular TV show “Shark Tank”, founders present their ideas to the so-called “Sharks” - experienced investors who decide whether they want to invest in the company. In each episode, it quickly becomes clear that money is crucial for every company and the need for capital changes depending on the phase of the company. Whether in the start-up, expansion, day-to-day business or crisis phase - capital is the lifeblood of a company.

The start-up phase is all about turning an idea into reality. Founders need seed capital to take the first steps. The first financial resources are invested in developing a prototype, conducting market research and registering patents and trademarks. But money is also needed for office equipment, marketing measures and hiring employees. For example, those who present themselves in the Shark Tanks are hoping for precisely this capital in order to take their first big steps.

Once the company is on a solid footing after its foundation, the expansion phase begins. Here it is crucial that capital is available to grow the business. Among other things, this means tapping into new markets, opening additional locations or expanding the product portfolio. The automation of business processes and the recruitment of additional employees also require financial resources. Those who are unable to raise sufficient capital in this phase run the risk of jeopardizing growth.

Capital is also constantly required for ongoing operations. From purchasing raw materials and paying salaries to rent and marketing expenses - day-to-day business must run smoothly. Investments in research and development and the maintenance of machinery also require regular financial resources. Good financial management is therefore essential to ensure that the company always has enough liquidity to react flexibly to changes.

Times of crisis are one of the biggest challenges for any company. This is where financial resources are crucial to ensure survival. Whether through emergency loans, government support or debt restructuring, companies must remain financially flexible in such times. Those who are well prepared and have reserves are better able to survive crises.

In summary, it can be said that companies have different financial needs in every phase of their life cycle. From start-up capital to investments in growth and liquidity in day-to-day operations, capital is a key success factor. The ability to procure the right financial resources at every stage is crucial for the long-term success of a company - and this is precisely where many founders in “Shark Tanks” rely on the expertise of investors.

External Financing

External financing is a common method used by businesses to acquire capital from outside sources. Unlike internal financing, which relies on the company's own resources and retained earnings, external financing involves raising funds from external investors or creditors. This form of financing is crucial for businesses looking to expand operations, invest in new projects, or manage cash flow.

There are several subcategories of external financing, each with its own characteristics and implications. One of the most traditional forms is debt financing, particularly bank loans. In this arrangement, a business borrows money from a bank and agrees to repay it over time with interest. Bank loans are popular due to their straightforwardness and flexibility; however, they often come with high-interest rates and stringent repayment terms, which can be burdensome for businesses.

Another form of external financing is equity financing, which involves selling shares of the company to investors. This can be done privately or through an Initial Public Offering (IPO). Equity financing is advantageous as it does not require repayment, and it can help a company raise substantial amounts of money. However, it also means relinquishing a portion of ownership and control to shareholders, which might not be preferable for all business owners.

Leasing is another viable option where businesses can use assets without owning them outright. This form of financing allows companies to utilize equipment, vehicles, or property by paying regular lease payments. Leasing can be cost-effective in terms of initial cash outlay, but over the long term, it might be more expensive than purchasing the assets directly.

Crowdfunding has emerged as a modern approach, particularly beneficial for startups and innovative projects. Through online platforms, businesses can raise small amounts of money from a large number of people. Crowdfunding not only provides financial support but also helps in gaining market attention and customer engagement. Nonetheless, it requires significant marketing efforts and carries no guarantee of success.

External financing presents several advantages. It allows businesses to quickly access the capital needed for investments or operational expenses without diluting ownership stakes. Interest payments on debt are often tax-deductible, providing further financial relief. With diverse options like loans, equity, leasing, and crowdfunding, businesses can choose the most suitable approach to meet their needs.

However, there are drawbacks to consider. Debt obligations can strain liquidity, especially during financial hardships, and excessive reliance on external financing can heighten bankruptcy risks, as creditors have precedence over owners. Strict loan covenants can also restrict managerial flexibility. Therefore, careful consideration of the benefits and risks associated with external financing is essential for sound financial management.