Alternative Financing

IE Focus | By Ignacio de la Torre, Academic Director of Master in Finance, Master in Advanced Finance

The credit crunch could go on for years. That’s why alternative funding is on the rise, and it looks like it is here to stay.In 2009 more European companies financed their businesses using bonds rather than banks. This has never happened before, so what’s going on? The current situation means that banks are having to clean up their balance sheets, build up equity and write off toxic assets, which makes it difficult for them to offer companies competitive interest rates. Plus, Basel III will penalize bank loans to companies, which further exacerbates the current liquidity crunch. This scenario has forced companies to do their homework and to seek alternative sources of funding for expansion.

What is alternative financing? It’s the kind that does not depend on the banks. Traditionally, risk capital has played a major role in financing companies undergoing growth. It is normally broken down into two types: venture capital, which finances startups (often technology-related businesses) and private equity, which is generally used by more mature companies with a lower growth rate and a higher debt volume.

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