The term financing encompasses all measures surrounding the procurement and repayment of capital needed by private households, companies or states to provide services and make investments. An important part of this is the structuring of relationships between lenders and borrowers.
The ways of raising capital can be categorised differently: according to the source of funds and at the same time according to the legal status of the capital providers.
In the case of the source of funds, a distinction is made between external and internal financing. With regard to the legal status of the providers of capital, a distinction is made between debt capital and equity capital. This results in four financing categories:
We speak of externally financed debt financing (credit financing), for example, in our crowdlending loan for SMEs.
Externally financed self-financing (equity financing) occurs when previous shareholders increase their contribution or new shareholders join through their contribution and thus increase the company's equity.
Internally financed self-financing (self-financing) occurs when past profits are reinvested in the own company.
Internally financed debt financing (provision financing) is also referred to as internal debt financing. This is the case, for example, when a pension provision is formed but will only be paid out in the future. In the time in between, the provision has a financing effect.
If the final financing is not yet secured, pre-financing may also be necessary. This is usually short-term and takes place when final financing was not yet possible for time or formal reasons. Accordingly, the borrower has a high financing risk. Since the follow-up financing and thus the repayment for the pre-financing loan has not yet been determined, the credit institution has a higher credit risk, which is why pre-financing is expensive.
If the final financing is legally agreed, it may nevertheless happen that the planned sources of financing are not available until later than planned. In this case, interim financing can bridge the period. The credit risk for the lender is not increased, interest is charged at a short-term rate.