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Not enough companies apply for equity financing

7 April 2016

​Companies should consider equity to a much larger extent, when applying for financing. That is the opinion at the Danish Bankers Association, which also concludes that not enough companies take advantage of this option.
Since 2007, Statistics Denmark has asked a selection of small and medium-sized enterprises (SMEs) three times about their specific financing measures including whether they have applied for anything other than loan financing at the bank i.e. equity, which unlike a loan is more risk-bearing.

Money to gain

Equity financing is well suited to entrepreneurs, who have larger investments ahead and need capital to run a bigger risk in order to create a growth in profits, or to companies, who already have a large amount of debt and can be made more robust with more equity.
Approx. 7 pct. of SMEs applied for equity in 2010, whereas that figure in 2007 and 2014 was closer to 3-4 pct.
“A very small proportion of SMEs have chosen to apply for more equity in recent years. This is significant, as we can also see that when companies decide to apply, very few are turned down,” says the Chief Economist at the Danish Bankers Association, Niels Storm Stenbæk.
In 2014, only 12 pct. did not fully or partially fulfil their requirements. Calculations by the Danish Bankers Association also show that the largest SMEs have a higher tendency to apply for more equity. For example, if a company has between 100 and 249 employees the likelihood of trying to apply is approx. 4.8 pct. Whereas, if a company has under 9 employees this corresponds to approx. 1.6 pct.
The calculations also highlight that companies with a large amount of debt actually try to increase their robustness with more equity, and companies that cannot capitalise themselves via revenue also to a large extent turn to new capital.

Figure 1: amount of SMEs that applied for equity
Source: Statistics Denmark and calculations by the Danish Bankers Association.

If needed, consider whether venture capital could be a solution

The study also maps out the reasons why more companies do not apply for equity. The figures show that approx. 60 pct. and 30 pct. of companies in 2014 answered that they did not need or apply for another kind of financing instead of i.e. bank loans. Approx. 5 pct. of the companies did not wish to hand over control of the company, which new equity agreements can involve, while 3 pct. did not see it as an option.
”If more companies are to apply for equity financing then it is a prerequisite that they experience a good framework for obtaining it. This requires better conditions and at the Danish Bankers Association, we would like to contribute to this work,” Niels Storm Stenbæk concludes.

Figure 2: amount of companies that did not apply for equity
Note: the figures do not amount to 100, as companies can chose several categories, and categories that do not enter in both years do not appear. No figures for 2007.
Source: Statistics Denmark and calculations by the Danish Bankers Association.
Further information:
Stine Luise Hansen, Head of Media Relations at the Danish Bankers Association.
Tel.: +45 3016 1009
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