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Circular Economy

Which types of financing are available for circular business models?

In general, financing is available in the form of equity, debt or grants/subsidies. But the right type of financing depends on the circumstances, such as the type of circular business model and maturity of the organization.

Three types of financing

1. Equity finance

In equity finance arrangements, the investment capital is obtained by relinquishing some ownership of the asset to the investor in exchange for money. Examples include:

  • Venture capital financing: e.g. for piloting unproven and untested cradle-to-cradle inspired technologies.

2. Debt finance

Debt finance arrangements involve the borrowing of funds for use as investment capital with the view that future earnings from the investment would be used to pay back the debt
with interest either by installments or at a specified period. Examples include:

  • Green Bonds & Climate Bonds: e.g. € 600 million of climate awareness bonds issued by the European Investment Bank (EIB) to raise funds for renewable energy and energy efficiency projects;
  • Lease financing: e.g. light leasing on a pay-per-lux basis between Philips and Rau Architects and furniture leasing by C2C ExpoLab;
  • Development agreements: e.g. deferred payment of upfront land cost for Park 20|20 development.

3. Grants & Subsidies

For specific examples of grants and subsidies refer to [REF TO ‘WHICH GRANTS ARE AVAILABLE…?].

Manu, Ankrah, Hammond, Wood,Baffour-Awuah, & Hingorani. (2014)., p9-19.

The right financing for the right situation

It is important to realize that a wide range of circular business models exists. They all involve different levels of risk and require different forms of capital as a result. Equity finance by shareholders is for example more appropriate than a traditional bank loan if a circular business model involves unproven – and therefore risky – technology. And crowd funding might be a suitable source of finance if the business model has a strong community aspect. The financial system has to mobilize different forms of capital to finance the transition to a circular economy.

ING Economics Department, 2015, p36.

ING - Types of Finance Maturity

Funding sources by maturity of the company (source: ING)