Traditional financing method: bank loans
Banks offer various loans for acquiring a business, with or without premises (commercial and real estate loans). However, today, the average interest rate has increased significantly. Since banks are borrowing at higher rates from the European Central Bank, loans to individuals or businesses are granted at an interest rate of 4.5%-4.75%, excluding insurance, guarantee fees, and processing fees.
Online banks offer loans and services that are more affordable than traditional banks.
There are also other ways to finance your acquisitions.
New financing methods:
- Financing through public appeal, also known as crowdfunding:
This financing method includes:
- Crowdlending: Individuals or businesses wishing to invest lend money by subscribing on the platform to the project of the operating business, which must repay the capital and interest agreed upon in advance when the contract is signed by the parties, as with a loan.
- Crowdequity: Individuals or businesses wishing to invest buy a (non-listed) share in the company operating the business, meaning they take a stake in the company’s capital. Example: The PEA-PME (Equity Savings Plan for SMEs) is offered with a return rate for the investor of 8 to 9% per year (without compound interest) over an investment period of 12 to 36 months. After 5 years, only the CSG (General Social Contribution) and RDS (Social Debt Repayment Contribution) of 17.2% are levied (whereas before 5 years it’s 30%).
Crowdfunding is experiencing significant growth. Real estate represents 46% of crowdfunding campaigns, while the retail and service sectors account for 19%. In the future, the percentages of people using this financing method will undoubtedly be much higher than those using traditional banks.
The reliability and integrity of the platform are monitored, as platforms located in France require approval from a public authority (Financial Markets Authority, Insurance Intermediary Register, or Prudential Control and Resolution Authority). Therefore, the risk of investors losing their investment is as low as if they were investing in a traditional bank.
Crowdfunding allows individuals to collectively finance a business creation, development, or takeover project through an online platform (such as Wiseed, Homunity in partnership with Boursorama, Anaxago, or Baltis).
These platforms typically offer prospective investors, whether individuals or companies, an entry fee (for example, €1,000) and the option to open a securities account or a share savings plan (PEA). The advantage for investors is that the return is short-term, often within 1 to 3 years. The rate of return is very attractive, averaging 9% to 10%, or even higher if the project is highly profitable. This is therefore superior to a bank investment. The risk is the loss of the investment if the business owner, buyer, or borrower cannot repay. Therefore, the platforms conduct thorough due diligence on each project.
However, knowing that the tenant is a business or commercial company with a 3-6-9 lease, this is a greater security for the investor than if the tenant were an individual.
For very large projects, such as those involving a property developer’s construction project, the developer’s profit upon the sale of the property is partly distributed to investors (which explains the high rate of return), and partly retained by the developer.
Sometimes, these platforms even lend funds to the buyer to help them build up a down payment to secure additional financing.
For buyers who lack sufficient funds, this financing method offers the advantage of faster loan approval than banks, often resulting in a loan even when traditional banks might reject them, lower interest payments due to the absence of intermediaries (bank advisors, etc.), and lower fees (many platforms offer no entry fees for investors).
From the borrower’s perspective, the risks are no greater than with a bank loan; the risk lies primarily with the investors, who bear a risk equivalent to their investment.
Crowdfunding is a fast financing method that allows businesses to benefit from effective communication and public feedback thanks to the advertising of their offering on the platforms. The business owner is therefore at the forefront of the expectations and desires of their current and potential customers.
The business owner will need to protect their patents and trademarks given the advertising of the funding project on the platforms’ websites. Similarly, businesses seeking funding through these platforms should be careful to maintain a majority stake in their company.
2. Financing through Blockchain
Blockchain is a secure technology that enables online transactions without intermediaries (such as banks). It is used to issue “crypto-assets” (or “cryptocurrencies”).
There are several ways to use this innovation in the financial system:
- Purchasing with cryptocurrencies:
Several virtual currencies exist; the two best known are Bitcoin and Ethereum. These currencies are based on blockchain technology and allow you to pay for goods or services, just like a traditional currency (such as the euro or the dollar).
You simply need a “wallet” (an online wallet) and to send the payment to an address (similar to a bank account number), which is therefore inexpensive.
This eliminates the need for banks.
However, their value depends on supply and demand, making their price highly volatile.
Furthermore, if there is a problem with payment, recourse is complicated, unlike with payments in euros or dollars via a regulated bank.
Cryptocurrency lending is possible through platforms.
However, unlike a bank loan, to borrow, you must have enough currency to deposit on the blockchain and lock it as collateral.
This works somewhat like a bank guarantee, except that to lend, you must lock up an amount greater than the amount borrowed. In other words, if you deposit 4,000 bitcoins as collateral, you can borrow from 20% to 80% of your deposited amount (loan-to-value).
- Initial Coin Offerings (ICOs): This is a fundraising method on the blockchain that allows the public to buy “tokens” at a certain value. These tokens represent part or all of an asset (for example, a commercial building), a service, or a financial security (stock or bond).
The following stand out:
- Utility Tokens: “Tokens” representing part or all of a company’s product or service, often with a discount.
These tokens are used to finance a project or the development of an existing offering.
A hotel, restaurant, or bakery can create its own tokens using software and then issue them to the public and/or its customers. Creating tokens is very simple (unlike creating a blockchain).
A hotel can issue 1,000 tokens worth €10 each, which its customers or employees can purchase. With the €10,000 raised, it could, for example, finance the purchase of new beds or other equipment, such as a coffee machine. The tokens would allow customers or employees to purchase a breakfast for €10, which is usually sold for €13.00. Token holders can then either use these tokens, save them for later, or resell them to other customers or employees, thus realizing a 30% capital gain, as the token’s value increases with the service’s value.
- Security Tokens: More sophisticated “tokens,” these are digital financial securities. Rather than selling company shares, the company issues them digitally.
The company does not need to be listed on the stock exchange to issue digital public offerings.
- Issuing new securities
This allows subscribers to have dividend rights.
These securities can represent several asset classes, such as a share, real estate, or other assets of a certain value.
This will allow the company to raise funds to finance a project (e.g., purchasing new commercial premises).
Given the stakes, it is important to seek legal advice to find investors and ensure the legal and financial security of these operations and to optimize them from a tax perspective to reduce the cost of taxation.