The financing of growth (growth is financially the same as investment in fixed assets and working capital requirements) is based on a trade-off between profitability, risk and flexibility.

Here is an analysis of the advantages and disadvantages of the main resources that can be mobilized:

1. Self-financing (Setting aside profits)

This is the internal resource generated by the company’s performance (Net Income) that is not distributed to shareholders in the form of dividends.

• Advantages:
  • Independence: Does not require the agreement of third parties (banks or new shareholders).
  • No explicit transaction costs: Avoid issuing or application fees.
  • Security: Strengthens equity without immediate dilution.
• Cons:
  • Limited by performance: The amount available depends directly on the financial profitability (ROE) and the dividend payout ratio.
  • “Sustainable Growth” constraint: If the company’s real growth is higher than its sustainable growth rate (sustainable growth rate = ROE * (1 – payout ratio)), the company cannot finance itself solely by self-financing without deteriorating its financial structure.

2. Equity (Capital Increase / IPO)

The company raises funds by issuing new shares to existing shareholders or the market (IPO, Private Equity).

• Advantages:
  • Financial security: The capital does not have to be repaid (residual and non-contractual remuneration).
  • Debt capacity: Strengthening equity improves solvency and allows debt to be raised at a later date.
  • Strategic flexibility: Allows you to finance risky or intangible assets (R&D, marketing) that banks find difficult to finance.
• Cons:
  • High cost: This is the most expensive resource. Shareholders demand a higher return (the cost of equity) than creditors because they take on more risk.
  • Dilution: The issuance of new shares dilutes the control and earnings per share of existing shareholders.
  • Signal to the market: A capital increase can be interpreted negatively (signal of overvaluation of the share or cash flow difficulties).

3. Financial Debt (Bank Loans and Bonds)

It is a contract by which the company borrows funds by committing to pay interest and repay the capital.

• Advantages:
  • Lower nominal cost: The cost of debt is lower than the cost of equity because the risk to the creditor is lower.
  • Tax Leverage: Interest is deductible from taxable income, which reduces the real cost of debt (the State subsidizes part of the cost).
  • Financial Leverage: If the economic profitability (ROCE) is higher than the interest rate, the debt mechanically increases the return on equity (ROE).
  • Discipline: The obligation to repay can force managers to a management discipline (Agency Theory).
• Cons:
  • Risk of bankruptcy: Failure to repay or pay interest can lead to default. Financial risk should not be added to high operating risk.
  • Loss of flexibility: Future cash flows are pre-empted by debt repayment (“Cash-flow committed”), reducing the company’s ability to react in the event of a setback (increased vulnerability) or strategic opportunity.
  • Increase in the cost of equity: Debt increases the risk perceived by shareholders (increase in Beta), which increases their demand for profitability (Hamada’s formula) and partially cancels out the benefit of the low cost of debt.

4. Hybrid financing (mezzanine)

Instruments halfway between debt and capital, such as Convertible Bonds (CB) or Bonds Redeemable in Shares (BRS).

• Advantages:
  • Reduced interest cost: CBs offer a lower coupon (interest rate) than traditional debt because the investor values the conversion option.
  • Deferred dilution: Capital dilution occurs only if the option is exercised or at maturity.
  • Adaptability: Allows you to structure tailor-made financing (“DEquity”).
• Cons:
  • Complexity: Requires financial engineering and sophisticated valuation (valuation of the optional component).
  • Potential dilution: If the conversion takes place, the current shareholders are diluted, but with a time frame.

5. Optimization of Working Capital Requirements (WCR)

It is a question of financing growth by reducing inventories, collecting customers more quickly or paying suppliers later.

• Advantages:
  • “Free” resource: Reducing working capital frees up cash immediately without direct financial cost.
  • Improvement of ROCE: By reducing the capital employed, economic profitability is automatically increased.
• Cons:
  • Operational risks: Reducing inventory excessively can lead to stock-outs. Pushing supplier payment terms can weaken the commercial relationship and destroy long-term value (mistreated subcontracting, declining quality).

Summary: The optimal method?

There is no such thing as a perfect resource. Theory indicates that debt only creates value through taxation. In practice, underleveraging (keeping a reserve of debt capacity) is often seen as a valuable real option : it is the price to pay for maintaining strategic flexibility to seize major acquisition opportunities at the right time.