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Business-to-business financing is a process companies use to raise capital without going through a bank, lender or brokerage house. Working with other businesses to secure external finances allows companies to create strategic business relationships (and possibly partnerships) that will help secure a competitive advantage. A few common methods for business-to-business financing is issuing bonds, selling stock or securing a direct investment. Each method has specific characteristics, although ultimately, each method will accomplish the same purpose.
Large organizations and publicly held companies have the ability to sell bonds to other companies. These investments represent debt financing and are typically riskier when used as business-to-business financing. If bond issuer begins to falter financially, liquidating assets and closing the business means the company will have to repay bondholders. Although other creditors may be ahead in line to received liquidated funds, bondholders will usually receive some money.
Selling stock and direct investments are somewhat similar in nature. Buyers will typically need a broker to complete the deal, but the issuing company will most likely have to enter a specific agreement for a large sale of stock to one shareholder. In some cases, companies may need their board members or other shareholders to approve a large business-to-business financing deal. The reason for this approval comes from the fact that another company can engage in a takeover of the company by purchasing other shareholder’s investment stakes in the company.
Dividend reinvestment plans allow a business investor to make a large purchase of a company’s stock and reinvest any dividends or other stock earnings back into the invested company. The purpose for this business-to-business financing is twofold. The buyer can maximize his investment by not touching the funds generated from the invested company. The business selling shares will not have to worry about paying out any funds from invested capital, allowing them a stream of financing for increasing their overall economic value.
A significant advantage with business-to-business financing is the fact that there can be limitless ways to secure external capital for business operations. Companies can also request loans from other businesses. This helps the requesting company avoid going through the hassle of applying for a loan and being held subject to a bank’s credit and repayment terms. Using a financing contract allows a company to look for business partners that will agree to favorable loan terms, such as low interest rates, delayed payments or loans with balloon payments several years into the future.