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What is meant by the term funding

The term funding has the same meaning as the word financing. There are basically two different types of funding: equity funding and debt funding. The origin of the capital for these two types of funding is different and there are the variants that a funding "from inside" or "from outside" takes place.

This results in four types of funding:

1. Credit funding is externally financed debt funding

2. Funding from reserves is internally financed debt funding.

3. Equity funding is externally financed self-funding.

4. Self-funding is internally financed self-funding

What exactly does credit funding mean?

In common parlance, when we talk about funding, we usually mean credit funding. This type of external funding is carried out by means of loans, which are granted from outside by a lender. Lenders are often banks, but there is also the model of financing by private investors, the so-called crowdlending. Here, several investors make money available to a borrower. In the case of externally financed loans, a distinction is made between full and partial funding, depending on how much of the funding sum is involved and how much of the borrower's own reserves are available. In return for providing the money, the lender receives interest, which is paid during the term of the loan. The amount of interest is usually based on the market interest rate and is additionally increased by a risk surcharge, depending on the financial conditions of the borrower and the collateral provided to secure the credit. If the borrower becomes insolvent, the collateral can be retained by the lender.

Various reasons for financing

There are different reasons which make debt capital or financing necessary for a company. Here are some examples:

  • In the case of start-up financing, a new start-up company receives seed capital.

  • With growth financing, an existing company receives money for growth and expansion.

  • In a refinancing, loans are restructured, for example a bank loan replaced by a bond.

  • In the case of renovation financing, the money flows into the renovation of a property.

  • In acquisition financing, money is borrowed to buy another company.

Which loans are available for which funding?

In principle, loans differ in their term. There are long-term and short-term loans. A distinction is made between the following long-term loans

  • Loans: as real estate financing, consumer credit or investment credit

  • Bonds: warrant bonds, government bonds, corporate bonds or convertible bonds

  • Facilities: standby credit, revolving credit facility, rollover credit or transloan facilities

  • Promissory note loans: as a special form of loan

The following short-term loans are also available:

  • Supplier credit: credit granted by a supplier to his customer by granting a payment term for the settlement of an invoice. 

  • Overdraft facility: credit line granted by a bank to a customer, limited to a maximum amount, which enables the customer to make dispositions over and above the credit balance of the current account.

  • Customer credit: Credit granted to a customer by a supplier. The lender charges an interest rate for paying the purchase price at another time. This can be advance payments, payments on account or down payments.

  • Lombard loan: The Lombard loan is a collateral loan and is mainly used for short-term and medium-term financing. It is a pledge in which securities or movable property are used as loan collateral. In return, the applicant receives a loan with a term from the lender. Taking out a Lombard loan ensures companies and private individuals liquidity and rapid financial recovery in the event of unexpected expenses.

  • Guarantee credit: A guarantee credit or a bank guarantee is a guarantee commitment by a bank to a borrower. For a fee, the bank acts as guarantor for certain liabilities.

  • Rembours credit: The rembourse credit is a possibility of financing import and export transactions, in which, for example, a domestic buyer provides the foreign seller with the acceptance of a bank to secure the purchase price.