Business Funding and Financial Resources
Funding
To carry out the activity of the company, it needs means of payment that allow them to make investments, and this is called the funding source. Funding refers to the liquid assets or means of payment available to the company to meet its cash needs. It can be classified as follows:
- Short-term funding source: When the term of repayment is less than a year.
- Long-term funding source: When the term of repayment is higher than a year.
- Internal financing: Profits, distributed quotas, and amortization.
- External funding: Capital, loan performance, credits, etc.
- Own funding: Capital and reserves.
- External financing: Credit, loans, etc.
Own Resources
Own resources are the most stable resources that a firm has. They do not need to be returned, but they have a higher risk in case of failure, and the partners are the last to receive the liquidation. Capital is formed by the contributions of partners that form a society. Book profits are distributed from the company and are part of its internal funds. Amortization is formed by the value lost in the process of production. Provisions are part of the result of the company that created a fund to deal with some losses that have been produced.
External Resources
Long-term external resources are those for which the company has a period superior to the duration of a financial year. This time, it has happened once again with the interests. Loans are used to borrow long-term financing. Credit is given to companies and acquired to sleep and changes of a particular interest. Leasing is a financing system for the firm that encompasses any change to fixed quotas. Renting is a modality that involves the rental of movable properties and is long-term.
Selecting the Funding Source
- Type of investment: In the case of an active fund source, financing should be short-term, and the repayment period should be higher than a year.
- Degree of debt: If you want to reduce it, find sources of financing.
- Cost of financing: Sources in the long run tend to have a higher cost than in the short term.
Resources beyond short-term cycles can finance part of its exploitation. Short-term loans that financial institutions require to meet the needs are:
- Short-term bank loans
- Trade credit: This is automatic funding when leaving purchases made by suppliers.
- Discounting of commercial paper: The company could take off letters that customers keep in their portfolio until maturity.
- Factoring: This is another form of financing, which is the sale of all rights of credit to customers.
- Spontaneous sources of financing: Those that do not require prior negotiation.
Market Value of Business Finance and Operations
- Fixed income asset finance: These are the contributing flows over time, such as bonds.
- Variable income asset finance: These generate an uncertain flow, and profits depend on the company.
Primary Market
This is where a company issues securities to investors. An unsubscribe might be a secondary market purchase, pure and traded on the sale value, which was previously issued.
IPO (Initial Public Offering)
This is the operation in which a company offers for sale a portion of shares offered.
Public Offering
Subscription of new shares resulting from a capital increase.
Stock Exchange
The Stock Exchange is the only market where shares are bought and sold, and it also trades with other financial assets (debt, obligations, subscription rights, etc.). Companies decide if they want to sell something or a product depending on their needs.
Advantages
- Contribute funding at a lower cost.
- The amount of funding is high.
- Improvement of the company’s public image.
Disadvantages
- Emissions could lead to a loss of power for the company.
- Periods should provide information to shareholders.
- The stock market is subject to external audits.
- Actions could end up in the hands of strangers or be unwanted by the shareholders.