Financing through the Reallocation of Assets

Procurement of cash and cash equivalents through the sales/ reallocation of assets outside the
sales process. Inflow of cash and cash equivalents that neither originate from external financing nor from
the sales process.
The process encompasses transforming assets, which may not serve as direct means of payment, into
liquid forms such as cash or its equivalents.
The liquidity of assets plays a crucial role in this process, emphasizing the need for assets to be easily
convertible into funds.
Financing through asset reallocation can prove to be critical in financing crisis liquidity bottlenecks.
Likewise, if a company uses this source of financing, it is by no means a clear indication of financial
crises.

Implementation of Financing through Asset Reallocation

The execution of financing through asset reallocation involves the following procedures:
➢ sales of asset that are not required for operation
➢ sale and lease back assets required for operation at the same time
➢ sales of receivable before maturity
➢ reduction of inventories

Financing Instruments

Equity Financing through Capital Contribution

It is a process of securing external funding by exchanging a portion of the ownership interest in a venture
for an unsecured investment in the firm.
 ➢ Contributors to this form of financing can include both previous shareholders and new
shareholders.
➢ Forms of shareholders contributions include cash and non-cash contributions.
➢ Equity is generally available for an unlimited period, providing a stable source of long-term
financing. However, it's important to note that ownership of equity may change over time.
➢ The success of raising equity capital is influenced by factors such as the market capability of
shares and the legal context in which the firm operates

Market for Equity capital

Debt financing
It is a secured means of funding a new venture, involving the repayment of borrowed funds along with an
additional fee, typically in the form of interest for the use of the money.

➢ Regular Payments: Debt financing requires the borrower to make regular interest payments
along with scheduled principal redemptions within a limited timeframe.
➢ Financing Risk - "Financial Leverage Risk": Debt financing introduces a financial leverage risk
associated with the obligation to meet interest and principal repayment commitments. This
indicates a higher level of risk compared to equity financing.
➢ Interest payments on borrowed capital provides a tax advantage when compared to equity
finance, as interest payments are deductible expenses.
➢ Investment Purposes: Debt financing is commonly employed for investment purposes, such as
acquiring equipment or overcoming liquidity bottlenecks.
➢ Information Asymmetry and Opportunity/Risk Profile: Information asymmetry between the
borrowing company and lenders is a potential challenge in debt financing
Mezzanine capital
➢ Utilization of hybrid financial instruments. MC is to be classified between pure equity and pure
debt.
➢ It holds a subordinated position to classical financial capital and, primarily, to real equity
➢ An "ideal" Mezzanine Capital design aims
o To be regarded from the banks point of view as economics equity capital with a positive
influence on the rating.
o from the point of view of tax authorities as debt capital, which enables the deductibility
of interest payment as operating expenses
➢ Example: subordinated loans, shareholder loan.

Information Asymmetry and Opportunity/Risk Profile in

Lending
The presence of information asymmetry between borrowers and lenders represents a general challenge in
financial transactions.
The opportunity and risk considerations for lenders encompass the following:
(+) Lenders benefit from a fixed remuneration entitlement, which remains relatively independent of the
borrowing company's overall development.
(+) Lenders enjoy a priority position in the repayment hierarchy compared to external contributors (EC
donors)
(-) Lenders face the inherent risk of experiencing either partial or total loss in the event of borrower
default

Counter-Strategies of Lenders/Creditor Protection Mechanisms:

➢ Credit Check:
Rigorous evaluation of the borrower's creditworthiness through credit checks helps lenders assess the risk
associated with the lending arrangement.
➢ Credit Protection:
Lenders may employ credit protection mechanisms, such as guarantees, to secure their position and
prevent potential lossess.
➢ Contractual Agreements:
Well-structured contractual agreements between lenders and borrowers define terms, conditions, and
repayment schedules, providing a legal framework that protects lenders' interests.