We all know that for running a business, certain requirements must be met. For starters, every company owner must have a level of knowledge about how to do it right. Next, you need an original and quality product, and a market to sell it. Furthermore, factors like product management, advertising, marketing, trained employees, and a plethora of others are all a driving force for any company. Nevertheless, up to this day, the biggest issue that every company faces is how to find fundings. With that in mind, the goal of today’s article is to teach you everything there is to know about corporate funding – meaning, definition, and sources.
This short, but information-packed read should provide you with enough information to understand what corporate funding is, and how to obtain it – and more importantly, how to use it in the most efficient way!
The definition of corporate funding
How do companies find money to invest when starting or expanding a business?
There are two main sources:
- debt funding
- equity funding
To understand what corporate funding is a bit better, I must first explain debt and equity funding.
Let’s see what the main differences between these two are!
Debt funding is easy to understand.
A company borrows a loan or takes credit from the bank to invest in the business processes.
They return the money over time, through monthly payments, depending on the type of contract they made.
While a great benefit is that the return payments are tax-deductible, the downside is that you must pay it back with interest.
And, you must return a loan or a credit whether your business made money or not.
One of the fatal mistakes that entrepreneurs make is to get a large loan or credit with a high-interest rate.
This can be especially dangerous for startup companies.
Equity capital is obtained through a sale of company stocks on the market.
Simply speaking, you sell a percentage of your company to shareholders, and in return, you get the money that does not need to be repaid.
You can do whatever you want with it.
However, even if this sounds like a better option than debt financing, there are some tricky things to know. For example, a company must maintain a consistent profit over time.
Otherwise, the company stocks will go down.
Furthermore, there is always a risk of losing control over your company if you sell too many stocks.
You must have in mind that shareholders own a part of the company, and they have rights as well.
How does corporate funding differ from debt or loan funding?
Technically speaking, corporate funding is a cheap alternative to equity or debt funding.
Instead of going to a bank or dealing with shareholders, you turn to tax incentives, zero-interest loans, and grants or fundraisers.
Sources of corporate funding
As I mentioned above, the main sources of corporate funding are:
- tax incentives
- zero-interest loans
On a corporate level, tax incentives are cash injections aimed at helping a business grow and expand.
They can be raised at state, federal, or local government level.
The best of all, they are non-refundable.
Furthermore, these incentives can be used for research and development, finding educated employees, improvement of undeveloped areas of a company, etc.
Zero-interest loans or even low-interest loans are the best forms of debt you can find.
It is important to know that usually there is no grace period, and all the monthly payments are tightly locked to a specific date.
These strict conditions are expected since there is no interest to pay back.
However, this can be a trap to fall into, since you can easily take a higher amount of money than needed.
No-interest feature draws a lot of attention, and if you are not careful, you might regret it.
Furthermore, if you fail to pay your monthly payment on time, you will pay huge penalties.
Large corporations often offer corporate grants to startups and small companies, as way to aid them in their growth.
There are two types of corporate grants:
- private grants
- public grants
Private grants are usually given to companies through an internal grant program.
On the other hand, public grants are usually made through foundations, and all the information is accessible to the public.
That means you can easily find out what the money is for, to what company it goes, etc.
Grants are also non-refundable, and they are a good example of corporate funding with a high percentage of ROI.
Besides corporations, grants can also be given by private foundations and federal agencies.
It is also important to understand that grants that are given by corporate foundations greatly differ from other grants.
The main source of investment, in this case, is the profit that a corporation makes.
What they do is, they take a percentage of that profit and award other companies with it in the form of grants.
For that reason, it is important to use that money the right way and work closely with corporate partners.
They must see that their money is put to good use.
Fundraisers are events created with the purpose of gathering money from commercial companies to aid the development of a business.
Different forms of fundraisers are:
- profit donation – a company gives away a part of their profit to support another company. This is also a type of grant funding.
- selling merchandise – retail companies often offer a possibility to sell merchandise of other companies in order to help them increase sales. They donate their offices and share customers.
- charities and checkout collections – you can often see agents working on checkout collections in order to gather money for a cause. Also, there are types of charities that support company growth by donating money.
How to use corporate funding in the most efficient way
Even though it may seem that a company would know what to do with the money when they get it, it often happens that the money is invested in the wrong sectors.
To spend corporate funding in the most efficient way, here are a couple of smart ideas:
- investing in research and development
- supporting the advertising and marketing sectors
- financing product lifecycle management
- training employees
- moving your business to a new location to explore new market
Corporate funding explained
As you can see, corporate funding comes in many different forms.
You can get quite creative, and with a carefully made plan, you can gather the necessary money quickly and form your budget.
Whatever you do, just remember to always be smart with how you use your corporate funding!