Business Financing: Own and External Resources

Business Financing

Own Resources

These are the most stable resources and the company does not have to repay them. They carry more risk in a bankruptcy because partners are the last to receive their share during liquidation.

Types of Own Resources:

  • Capital: Formed by contributions from partners. Capital increases can occur through individual contributions or from high-risk companies.
  • Reserves: Come from retained earnings and are part of internal self-financing. There are three types:
    • Legal: Amount fixed by law.
    • Statutory: Set by the company’s bylaws.
    • Voluntary: Determined by extraordinary profits and state/private grants.

Financing Maintenance:

  • Depreciation: Estimates the value lost by fixed assets during production. The value is incorporated into the product cost to be recovered upon sale. As the years pass, the sinking fund increases, allowing for asset replacement at the end of their economic life.
  • Provisions: Funds set aside to meet potential future losses or expenses.

External Resources: Long and Medium Term

These are resources the company holds for a period longer than a financial year and must repay with interest.

Types of External Resources:

  • Long-Term Loans: Businesses request credit from institutions. Once approved, the company receives the money immediately and repays it with interest.
  • Bonds/Debentures: Debt obligations issued by firms and purchased by individuals/companies in exchange for interest. Used when large sums are needed and loan conditions are unfavorable.
  • Leasing: Allows a company to acquire a fixed asset in exchange for a rental fee. Involves three parties: the client, the manufacturer, and the leasing company. Duration typically matches the asset’s economic life. Lease payments cover depreciation, interest, administrative costs, and a risk premium.
  • Renting: Similar to leasing but for movable and immovable assets. The tenant pays a fixed monthly fee for a specified period. Benefits include:
    • Use of the property during the contract term.
    • Maintenance of the property.
    • Comprehensive insurance.

Short-Term Debt Capital

Common Sources:

  • Short-Term Loans: Money borrowed from a financial institution to cover short-term needs.
  • Bank Credits: Two types:
    • Overdraft: Using an amount exceeding the available balance in a checking account. Provides immediate access to funds.
    • Credit Account: Used when a company anticipates needing funds but doesn’t know the exact amount. Accessed by issuing drafts.
  • Trade Credit: Automatic financing obtained when purchasing from suppliers. Allows the company to use materials before paying for them.
  • Discounting Bills: Transferring customer debts (documented in bills of exchange) to a financial institution, which provides an advance payment minus fees and interest. The bank assumes the risk of non-payment.
  • Factoring: Selling all rights to credit on customers to a ‘factor’ company. Provides immediate liquidity, avoids payment defaults, and eliminates the risk of customer non-payment.
  • Spontaneous Funds: Financing sources that don’t require prior negotiation, such as Social Security payments.