What are the Methods of Fundraising for a Corporation? Comprehensive Explanation Including Methods Other than Third-Party Allotment of New Shares

When considering how corporations, such as startups, raise funds, it is often imagined that they receive investments from investors like venture capitalists (VCs) and issue their own shares. However, there are various methods for startups and similar companies to raise funds, not just through receiving investments and issuing shares. In this article, we will explain the methods of fundraising for corporations.

Possible Methods of Fundraising

The following are the major methods of fundraising that can be considered:

• Fundraising by selling assets of a corporation, etc. (Asset Finance)
• Fundraising by borrowing money (Debt Finance)
• Fundraising by receiving investments from investors such as VCs (Equity Finance)

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About Asset Finance

Asset finance is a method of fundraising where corporations, such as venture companies, sell their assets. Assets that can be considered for sale in asset finance include real estate, securities, inventory, receivables from clients, machinery and equipment, vehicles, copyrights, and patent rights.

Advantages of Asset Finance

It can reduce the cost of fundraising

One of the advantages of asset finance is that it can reduce the cost of fundraising. When selling assets, there is no significant cost involved in the sale, which can ultimately reduce the cost of fundraising.

It can potentially increase the value of the company

Another advantage of asset finance is that it can increase cash and deposits on the balance sheet by reducing the target assets. This can potentially increase the value of the company.

Disadvantages of Asset Finance

It cannot be done if there are no assets to convert into cash

One of the disadvantages of asset finance is that it cannot be done if there are no assets to convert into cash. Therefore, it can be a difficult method of fundraising for venture companies and others with few assets.

It is difficult to select assets to convert into cash

Furthermore, there is a risk of selling assets that should not be sold in the pursuit of fundraising. Therefore, when conducting asset finance, it is necessary to carefully consider whether there are assets to sell and whether those assets should indeed be sold.

About Debt Finance

Debt finance refers to the process of raising funds through liabilities, such as borrowing from banks or issuing corporate bonds. Syndicated loans and private placement bond issuance are also examples of debt finance.

Advantages of Debt Finance

The following points can be considered as the advantages of debt finance.

No impact on management rights as there is no change in the shareholding ratio

In equity finance, which will be explained later, the issuance of shares and other actions can lead to changes in the shareholding ratio, which can affect management rights. On the other hand, in debt finance, funds are raised through liabilities, so there is no change in the shareholding ratio and no impact on management rights. This is an advantage of debt finance as it allows the management team to operate freely without being affected by fundraising.

Potential for credit enhancement

Since debt finance involves raising funds through liabilities, the corporation naturally has to repay the debt. If the corporation has been making solid repayments on the debt incurred through debt finance, it can lead to credit enhancement, indicating that the corporation is reliable in making repayments. As a result, it may be easier to pass the screening process when receiving large loans from financial institutions, which is a benefit for the corporation.

Potential for tax savings

In debt finance, it is common to pay interest to the fund provider. The interest paid during debt finance can be treated as an expense for accounting purposes, which can potentially reduce taxes. Considering only the tax aspect, this can be seen as a benefit for the corporation.

Easier to raise funds

From the perspective of the fund provider, they can consider the amount of funds to provide based on the corporation’s credit, making it possible to raise funds without taking on significant risk. Because the risk to the fund provider is small, it is easier for them to make the decision to provide funds, making it easier for the corporation to find fund providers. Therefore, it is easier to raise funds in debt finance, which is an advantage of this method.

Disadvantages of Debt Finance

Increases liabilities on the balance sheet

As explained above, while debt finance can potentially provide tax savings, it also increases liabilities on the balance sheet. Corporations generally have some level of debt, but if the proportion of debt becomes too high, it can make the company appear to be performing poorly from a numerical perspective. Therefore, the increase in liabilities on the balance sheet due to debt finance can be seen as a disadvantage.

Need to make repayments

In equity finance, which will be explained later, the corporation receives funds as an investment, not a loan. Therefore, while there may be dividends and distribution of residual assets in the event of liquidation, there is no need to repay the funds received. In contrast, debt finance is a loan, not an investment, so the funds received must be repaid. This is a disadvantage for the corporation.

Need to pay interest

It is common to pay interest on the debt incurred through debt finance. Therefore, you need to pay more money than the funds raised by the amount of interest. The need to pay this interest is a disadvantage for the corporation.

About Equity Finance (エクイティファイナンス)

Equity finance refers to a corporation issuing new shares and allocating them to investors such as venture capitalists (VCs) to raise funds. The main methods of equity finance include public offerings, allotment of new shares to existing shareholders, allotment of new shares to third parties, and issuance of convertible bond-type new share options.

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Advantages of Equity Finance

No need to pay interest

In the case of equity finance, since it is not a loan, there is no need to pay interest. If interest payments are involved, it could potentially be an expensive way for a corporation to raise funds. Therefore, the absence of interest payments can be considered an advantage of equity finance.

No need for repayment

With equity finance, since it is not a loan, there is no need to repay the funds raised. The fact that there is no need to repay the funds allows the corporation to retain assets, which can be considered an advantage of equity finance.

Increased capital can strengthen financial structure

In the case of debt finance, as explained above, liabilities increase on the balance sheet. In the case of equity finance, the funds raised become the corporation’s capital, which can strengthen the financial structure and make the company appear successful. This can earn trust from business partners and financial institutions. Therefore, strengthening the financial structure can be considered an advantage of equity finance.

Disadvantages of Equity Finance

Impact on management rights

In the case of equity finance, it is necessary to issue shares to investors such as VCs. This changes the ownership ratio and can affect management rights. This can be considered a disadvantage of equity finance.

Potential difficulty in raising funds

In the case of raising funds through equity finance, the provider of the funds is not lending money but providing it as an investment. This requires consideration of the risks involved in the investment, which may make the provider hesitant to provide funds easily. As a result, it may become difficult for the recipient to raise funds, which can be considered a disadvantage of equity finance.

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Summary

We have explained the methods of fundraising for a corporation. For a corporation, cash flow is a very important issue. Therefore, it is important to appropriately select and carry out the fundraising methods introduced in this article. Each fundraising method has its own merits and demerits, so it is important to fully understand the merits and demerits of each method. If you are a corporate manager who is anxious about fundraising methods, please consult with a professional such as a lawyer.