In the current economic environment – marked by fluctuating interest rates, tightening credit lines, slowing growth, and increasing market uncertainty – corporate finance has become a strategic issue for every company. Relying solely on internal reserves is increasingly insufficient: in many cases, raising external sources is essential to maintain the operations, implement investments, or fund growth. However, it makes a significant difference what type of financing is chosen, under what conditions, and at what point in time – as a poorly made decision can determine the company’s financial flexibility and competitiveness for years.
Businesses today have access to a wide variety of financing options. The key question is which financing method best suits a company’s current operational circumstances.
Financing is not one-dimensional
Financing a company is not just about choosing between bank loans and attracting external investors. Reality is far more complex and – fortunately – offers many more tools than one might initially think.
The classic axis of equity vs. debt financing is still relevant, but there are numerous nuances and specific solutions in between:
- If a business relies only on internal resources, owners may inject funds through equity or retain earnings within the company. Various equity transactions (e.g. capital increase through equity injection, reallocation of equity elements) must be carried out in line with the Hungarian Civil Code and the Accounting Act, which may also require company registry procedures. In addition, compliance with equity adequacy rules and special contribution-in-kind regulations is crucial. In multi-member companies, shareholders may even pre-commit to performing a capital increase (with share premium) upon achieving certain milestones, with the management authorized to call such commitments. Since capital increases may dilute ownership, required voting thresholds must be clearly understood in advance.
- Internally, the company itself may also take steps to self-finance its operations. This includes tax optimization mechanisms such as creating development reserves, utilizing various tax allowances, or applying any lawful cost-reduction method. Alternatively, additional funds may be raised by divesting significant assets (e.g., real estate) or outsourcing an activity (business line transfer), with the profits reinvested into the core operations.
- While strong capitalization contributes to financial stability, debt financing may also offer advantages. For example, shareholder loans may be repaid at maturity, and from an asset protection perspective, the shareholder qualifies as a separate creditor. Similarly, additional shareholder contributions provided to cover losses may later be reimbursed if no longer needed. Beyond shareholder loans, related parties (other group member entities) may also provide financing, subject to transfer pricing rules and, where applicable, banking regulations (Hungarian Credit Institutions Act).
- External financing does not only cover intragroup loans but also bank financing. In practice, successful bank due diligence and solid banking relationships can be decisive for obtaining a bank credit. Factoring, leasing, and even crowdfunding may also be considered, depending on whether the purpose is working capital, investment, or market expansion. External lenders typically impose covenants and obligations on the borrower and, in some cases, on its shareholders as guarantors. These may restrict future dividend payments or the repayment of shareholder loans.
- Intragroup restructuring and rationalization of receivables and liabilities are also common financing strategies. Transactions aimed at extinguishing liabilities, as well as reorganizations involving (holding) structures, require careful legal, accounting, and tax review.
- Government and EU grants form a distinct financing category. In certain industries, they are almost indispensable, while in others, they serve merely as a “bonus.” Whether within the tax system (e.g. development tax credit) or outside of it (e.g. VIP cash grant or other direct grant applications), the devil is always in the details. Moreover, available schemes differ significantly for SMEs and large corporations.
- For significant financing needs, companies may bring in investors or minority shareholders, who can acquire stakes either through a capital increase or by purchasing existing shares. Involving an external investor usually entails lengthy due diligence and negotiations. Institutional investors often impose additional requirements. In multi-owner settings, it is highly advisable to conclude a shareholders’ agreement, covering priority rights, exit options, transfer restrictions, and deadlock situations.
Structure and mindset – Keys to growth
It is not only about where the money comes from but also how it flows within the company. A well-designed group structure cannot only provide legal or tax advantages but also supports scalability, risk management, and investor readiness.
As a business grows, it becomes increasingly important to determine in what rhythm, under what structures, and under what conditions its operations are financed.
Our new blog series does not merely aim to present individual financing forms but also helps navigate the available options. Our goal is to demonstrate through real-life examples different options companies might have, what to pay attention to, and which benefits and risks must be weighed when selecting the appropriate financing structure.
