What is hybrid financing?

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For any organization, securing capital is paramount to business success. According to the U.S. Small Business Administration, the most common sources of capital for financing business expansion are personal or family savings, business profits and assets, business loans, and business credit cards. These are just a few financing options that a business may use to operate and grow. Yet oftentimes standard investing practices get siloed among specific kinds of businesses. This leads to challenges when a business tries to gain access to the wealth of capital potentially available to it.

One businessperson shows two other businesspeople data on a monitor

Encompassing traditional investment models and actual investing options, hybrid financing creates more potential for businesses to gain capital by merging business types with previously inaccessible investing opportunities.

This newer method of financing is just one strategy students can explore while earning a Master of Business Administration. Gaining knowledge of financing methods can help students round out their professional expertise and provide the flexibility to adapt within a demanding and changing workforce. Knowing what financing options exist is a valuable trait to have as an entrepreneur or finance manager.

The basics of hybrid financing

The hybrid financing definition includes characteristics of both debt and equity, two ends within the financial spectrum, in order to provide financial security. Hybrid financing is where debt and equity meet in the middle, offering investors the potential benefits of both.

The advantages and disadvantages of hybrid financing align with the positives and negatives associated with debt and equity. The risk is akin to any investment, regardless of type, but the benefits include access to cash and assets connected with both equity and debt for investors. For the organization, hybrid financing can provide regulatory or tax benefits.

Sources of hybrid capital

Capital derived from hybrid sources can be raised through a variety of options. Potential sources of hybrid financing include:

  • Preference capital: this special type of hybrid financing requires a company to share dividends with this group of investors before paying out common stock dividends. This minimizes risk since these shareholders are paid first, creating a greater chance of funds being available should the company get into financial trouble.
  • Convertible debentures: a type of loan that can be converted into stock, this type of hybrid financing is paid back after other fixed-income holders receive their dividends.
  • Hybrid securities: this broad category of hybrid financing is often broken down further into specific areas such as commodity risk, foreign exchange risk, interest rate risk, and even an area focused on diminishing the seniority disparity between bondholders and stockholders. Returns for this type of investment are often associated with a set of common economic variable quantities such as commodity price, interest rate, and foreign exchange rate, among others.

Options and warrants are also grouped into hybrid funding sources. Although different in their specifics, each source sets a fixed price and date or range of time in which an investor can supply capital through the purchase of either stocks or assets.

Applying hybrid financing to social enterprise

Social entrepreneurship is one sector of business where hybrid financing can have a strong beneficial presence. Because these businesses make money in a socially responsible way and typically focus on well-being or service, they can struggle with finding funding options that fit their needs. Traditionally, gaps have formed between securing grant funding and getting the investment capital required to start and scale a business This leads to a financial struggle, even though a portion of the financing is readily available. Hybrid financing helps to drive greater impact in these situations because it allows organizations to use a combination of capital forms, merging financing from grants, debt, equity and convertible capital.

Overall, this strategy creates versatility for organizations who find themselves unable to close the gap between multiple traditional financing outlets. It provides options to combine capital sources received as a single payment or delivered over time, improving the potential for securing capital.

How to build knowledge on all financing options

Hybrid financing is just one of many potential capital sources an organization can explore when looking for funding. It’s important that finance managers possess the knowledge relevant to helping their business succeed when it comes to securing the means to grow. Earning a master’s degree in business administration can give you access to the latest trends and complex strategies used in business today. The online Master of Business Administration at University of Alabama at Birmingham provides you the option to focus your degree in an area of business specifically relevant to your career—finance, marketing, management information systems or health services. Within the finance concentration, you’ll have the opportunity to round out your expertise by studying topics relevant for those already in accounting and finance, such as financial planning, hybrid financing, and working capital management. A graduate education can also expand your knowledge of foundational business principles.

Focusing on all aspects of business, from insights and analytics to management techniques and leadership styles, an MBA promotes career growth by boosting your current financial and economic acumen. Learn more about how the University of Alabama at Birmingham’s online Master of Business Management degree can benefit you. Reach out to an enrollment advisor today.

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Frequently Asked Questions about Small Business by U.S. Small Business Administration

Hybrid Financing by Business Jargons

Building the social enterprises of the future with hybrid financing by Alliance Magazine

Say Hello to Hybrid Finance by Forbes Magazine

Online Master of Business Administration – University of Alabama at Birmingham