Strengthening equity capital, a necessity for SMEs that want to grow

What is « equity » ? It is the capital contributed by the shareholders, increased by the profits generated by the company and which has not been distributed in the form of dividends. In accounting terms, it is made up of « shareholders' equity » and « other equity ».

Shareholders' equity, classified at the top of the liabilities side of the balance sheet (« equity »), comprises the company's share capital, retained earnings (debtor or creditor), grants and regulated provisions. « Other equity », located just below, between shareholders' equity and financial debt, consists of financial instruments that are non-refundable or under the exclusive control of the debtor, or by the issue of other equity instruments. Not always considered as equity, these instruments are also recognized in the total assets , above the debts.

The value of equity is of crucial importance to the company, as it is a tool for assessing its ability to borrow and invest. At certain key moments in the life of the company, it can thus become vital for the SME to strengthen its equity. Certain private debt instruments, which the FirmFunding financing platform provides access to, may be the solution.

Why strengthen its equity capital?

The level of equity capital is considered a strong indicator of the company's solidity, a guarantee of the durability of its model. Indeed, the solvency of the SME is assessed by comparing the level of equity capital with that of financial debts. This indicator is therefore often a prerequisite for receiving new financing from banks or financing institutions. It is common practice in the SME development cycle for a minimum level of equity capital to be required, either to guarantee new financing or to improve the company's debt capacity. The strengthening of equity capital can therefore be a real prerequisite to enable the SME to ensure its growth.

How to increase your equity capital?

The first solution is to set aside a part of its profits, which implies, for the SME, to have a sufficient level. It can also increase its share capital, by asking shareholders to subscribe for new shares or equity securities, or by bringing in new shareholders. However, such solutions are not always possible or desirable (e.g., when there is not enough profit or when shareholders are unable to re-capitalize).

The alternative is then to strengthen other equity, which, although not necessarily considered as equity for accounting purposes, is classified above financial debts in the balance sheet. This « quasi-equity » to be increased is made up of :

  • partners' current accounts
  • or sources of financing in the form of private debt, the repayment of which is in the hands of the SME borrower or which are convertible into equity securities: subordinated debt, equity loans, mezzanine debt.

Private debt financing, a tool for strengthening equity capital

FirmFunding is a financing marketplace whose purpose is to put SMEs in search of equity financing in contact with professional investors who are likely to finance them. Its goal is to democratize access to private debt tools for SMEs, which are still too often reserved for large groups and ETIs.

Beyond the interest for SMEs to strengthen their equity capital, private debt financing has the great advantage, firstly, of being non-dilutive instruments (it does not reduce the share of the founders in the share capital) and, secondly, of being repaid at the end of the term, i.e. at maturity. This makes it possible to preserve the company's cash flow and give it the possibility to invest in its development.

It enables the financing of any type of project, whether for internal or external growth, or for the transfer and recomposition of shareholders (OBO, MBO, MBI). In principle, no sector is excluded from private debt financing, provided that the SME is at a stage of maturity and sufficient profitability. More than sixty projects have thus been put online, in a variety of sectors, such as real estate (real estate development, real estate merchant, urban heritage), agro (methanization, external growth, transition to organic), IT / consulting (shareholder restructuring of a company in the IT/SaaS services sector), audiovisual (organic growth) ...

But private debt presents several realities according to the type of instrument concerned, with different yield, structure and repayment rank. These are those that involve repayment at least in part in equity securities (shares) that are assimilated to quasi-equity, convertible bonds or mezzanine debt. The repayment of the latter is in fact subordinated to that of a senior debt and includes a remuneration component in the form of equity securities.

FirmFunding, the only marketplace that provides SMEs with access to tools for strengthening their equity capital

How can one access the advantages of private debt when one does not know the professionals (management companies, family offices) who can provide this type of financing? FirmFunding, the first and only financing platform dedicated to private placement, allows SMEs to put their financing project online and present it to registered professional investors (+200).

In order to meet the requirements of private debt professionals, FirmFunding has established the eligibility criteria for financing projects and the companies carrying them: the amount of the project must be at least 1 million euros and the company must be a joint stock company (SAS, SA...) or likely to be transformed into a joint stock company, generate at least 5 million euros in revenues and be profitable or in the process of being profitable (Ebitda>0).

Prior to the eventual online publication of the project, the FirmFunding teams determine with the SMEs and their consultants whether their project is eligible. The process of putting financing projects online has been simplified and standardized, in order to meet investors' expectations and maximize the chances of SMEs to find the desired financing. The FirmFunding teams assist SMEs and advise them on the points to be developed and put forward (existence of guarantees that promote the security of the project, details on certain sector specificities, highlighting of strengths, explanations of what might appear to be weak points...), in order to attract the interest of investors registered on the marketplace. Only these investors have access to the financing projects, which remain confidential. The FirmFunding platform is not open, which makes it possible to maintain the confidentiality often desired by SMEs.

SME, Entrepreneur, Consulting, you or one of your clients has a development project and wishes to diversify its sources of financing while strengthening its equity capital? The FirmFunding teams are there to help you. Do not hesitate to contact us.

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