Table 1 Main financing mechanisms and their potential to influence a firm’s strategy.

See section S1 for a glossary of all financial terms used throughout the paper.

Type of financingFinancing mechanismDescriptionPotential to impact firm strategy
InternalRetained earningsProfits generated by a
company that are not
distributed as dividends.
None, as it is the firm itself deciding about the use of proceeds.
ExternalInformal financeA broad range of
instruments, most
importantly trade credit
and leasing, as well as
financing from friends and
No institutional mechanism in place.
Little potential with trade credit and
leasing as this is usually tied to
particular assets being prefinanced.
Venture capitalA form of financing provided
to startup companies and
small businesses deemed
to have high growth
Depends on the ambition of the
investors and where they perceive
the enhanced value of the company
to lie. Venture capitalists usually aim
at selling their stake relatively
DebtLoanA direct lending for particular
projects or to the
organization. It may be via
preapproved credit line
that can be drawn on
demand. Loans are
flexible and can be
unsecured or secured by a
borrower’s assets, as well
as long term or short term
(often used for immediate
expenses, such as
Mainly upon the closure of the contract.
Covenants (i.e., conditions associated
to the loan) can be written into the
contract and are then subject to
monitoring and enforcement.
Supervisors of lenders may also
require they assess nonfinancial risks
of loans and the loan portfolio.
BondA type of loan tradable on
the market. It is accessible
for large organizations
and comes with
requirements regarding
disclosure of financial
information. Usually
organized by a group
(“syndicate”) of financial
institutions who try to
place the bond issue with
Mainly upon origination of the bond
issue. Additional requirements can
be written into covenants and
subject to monitoring throughout.
“Green” bonds use the principal
amount or the proceeds to
specifically further environmental
objectives. Stock exchanges may
require the disclosure of information
from companies being listed.
EquityA stock market instrument
(although it can also be
placed privately) linked to
the process of raising
capital through the sale of
shares in a company. It
provides a claim on part of
the profits (dividend) as
well as voting rights.
Ownership of the share in the firm
allows shareholder to speak up
during annual general meetings and
advocate particular causes or
organize petitions among
shareholders that can be voted. The
higher the share, the more influence.
Stock exchanges may require the
disclosure of information from
companies being listed.