If companies want to grow, they must invest — for example in technologies, machinery, equipment or personnel — and they need capital to finance all of this. Growth financing therefore refers to a financing measure specifically aimed at enabling a company to expand. In the world of start-ups and scale-ups, this is entirely common: young companies regularly raise equity capital from investors through publicly visible financing rounds in order to enter new markets or drive innovation even without significant revenue.

Medium-sized companies, however, tend to be more cautious when it comes to growth financing, particularly when equity participation is involved. Yet innovation and transformation are often critical to the success of medium-sized companies in Germany — and especially in Bavaria. Businesses in the region frequently operate in specialized and transformation-driven sectors such as machinery and plant engineering, automotive, or electrical engineering — sectors highly dependent on innovation. The challenge: unlike listed corporate groups, medium-sized companies often lack sufficient equity to finance major growth investments without negatively affecting ongoing business operations.

The effects of the coronavirus pandemic, the war in Ukraine and their economic consequences have further depleted equity reserves — even among companies with solid balance sheets and future-proof business models. On top of this, additional current factors make growth more difficult in general, and particularly for the Mittelstand: bureaucratic requirements, high energy costs, digitalization and transformation needs, shortage of skilled labor, demographic change, and increasing international competitive pressure.

The Mittelstand Has Various Financing Options

While day-to-day business continues in many places, major investments are being put on hold due to a lack of financial resources, insufficient equity and an uncertain outlook. However, a range of instruments is available to the Mittelstand to finance growth initiatives — from equity participation and debt financing to hybrid financing models such as mezzanine capital, e.g., silent partnerships. The choice of the right financing structure depends on several factors, including corporate objectives, medium- and long-term strategy, current capital structure and risk willingness. What are the differences?

Equity-Based Financing (Equity Participation))

Equity-based financing, or equity participation, typically comes from investors who receive a stake in the company in return for their capital. This form of financing is particularly suitable for companies with strong growth ambitions and high capital requirements. Equity can be provided by specialized investment or private equity firms that often provide substantial capital. In the case of a majority investment, the investor assumes strategic control and actively develops the company further, for example through acquisitions or consolidation of businesses.

Minority shareholdings, however — such as those offered by BayBG — leave control in the hands of the shareholders or management. The investor acts as a partner providing capital, know-how and network access, offering strategic support where needed. For medium-sized companies, whose success often lies in continuity and personal business relationships, minority equity participation is an attractive alternative — enabling growth while keeping control “in the driver’s seat.” From the outset, existing shareholders and the investor agree on clear rules for how the minority stake will be resolved once the growth objective has been achieved. A partnership with BayBG therefore aims for the company to remain autonomous and independent over the long term.

Incidentally, minority equity investments are also the foundation of the financing rounds raised by start-ups in the form of venture capital. Here, too, investors provide not only capital but also industry know-how and contacts to potential customers to accelerate early-stage growth.

Debt-Based Financing

Debt-based financing refers to the use of loans and credit facilities that must be repaid at a later date. This type of financing is generally the most cost-effective and is particularly advisable when a company still has unused borrowing capacity. Traditional bank loans are the most common form of this financing. However, they come with specific restrictions and risks: collateral must typically be provided to the bank, and ongoing interest and principal payments place a burden on the company’s cash flow. In addition, covenants — contractual clauses imposing financial or strategic obligations — often restrict entrepreneurial flexibility. Ultimately, in times of crisis, regulatory constraints often leave banks no choice but to withdraw loans, which can push companies into existential financial distress.

A potential alternative is financing through public development banks such as KfW (Kreditanstalt für Wiederaufbau) or LfA Förderbank Bayern, which offer loan programs with reduced interest rates and longer maturities — an attractive option for long-term growth projects. However, companies must first meet strict program requirements before they can access these funds.

Hybrid Financing

Hybrid financing combines elements of both equity and debt financing — for example, mezzanine capital. Depending on its structure, mezzanine financing may be more debt-like or equity-like.

Subordinated loans are the more debt-like variant. In the event of insolvency, they are repaid only after senior creditors. The benefit: their subordinated status strengthens the balance sheet, improves liquidity and can make it easier to obtain additional debt financing.

Silent partnerships, on the other hand, are typically structured as equity-like instruments — often without covenants or amortization during the term, and frequently with an agreement on subordination in pre-insolvency scenarios. They function in many ways like equity, without it being visible externally that an investor is involved — hence the term “silent partnership.”

Such financing models are particularly attractive for medium-sized companies, as they enable them to retain independence and preserve their often decades-old corporate culture. With a temporary investor on board, companies can pursue growth objectives and repay the silent participation at the end of the agreed term.

BayBG: Decades of Experience in Equity-Based Growth Financing

Even though today’s economic climate is challenging, investments in growth, innovation and long-term resilience should not be postponed due to a lack of equity. Medium-sized companies have attractive instruments at their disposal — particularly minority shareholdings and mezzanine financing — to strengthen their equity base while benefiting from the strategic expertise and network of an experienced partner.

For over 50 years, BayBG has been offering customized equity solutions to medium-sized companies and start-ups, financing more than 4,000 Bavarian businesses and enabling countless growth initiatives. This experience directly benefits both partners and customers — day after day, and in equal measure.