Business Funding Strategies: Types of Capital & Financing Options

Posted on Sep 17, 2025 in Economy

Understanding Business Funding: Sources and Types

Key Characteristics of Funding

  • Funding: Obtaining financial resources necessary to carry out an investment or business activity.
  • Duration:
    • Permanent Capital: (e.g., members’ contributions, self-financing, long-term debt)
    • Current Liabilities: (e.g., debts to suppliers and creditors)
  • Ownership:
    • Own Resources: (e.g., partners’ capital, self-financing)
    • External Resources: (e.g., bank loans, bonds)
  • Origin: External and Internal resources.

External Funding: Short-Term Capital (C/P)

These options provide quick access to capital, typically for operational needs.

  • Operational Financing (Non-Negotiated)

    Financing of operations not requiring specific negotiation by public agencies in companies. Example: Commercial Credit through postponement of payments by suppliers of goods and services.

  • Negotiated Commercial Discount

    Negotiating with a bank to deliver Bills of Exchange and collect the amount in advance. The entity will charge a commission and interest.

  • Short-Term Bank Credits

    Require negotiation and personal or property guarantees (e.g., endorsements).

    • Current Account Credit: Opening a credit line with a policy of paying commissions and availability fees.
    • Overdraft: A “red” balance in an account, typically incurring very high interest.

  • Factoring

    Assigning receivables (invoices) to a specialized company.

    • Advantages: Avoids administrative tasks, provides immediate cash flow, and eliminates the risk of possible defaults.
    • Disadvantage: High cost due to commissions.

External Funding: Medium and Long-Term Capital (M/L-P)

These options provide capital for longer-term investments and growth.

  • Loans

    Immediate availability of money, formalized in a loan agreement.

  • Financial Leasing

    Leasing machinery, equipment, etc., involving a leasing company, the selling company, and the user. Often includes a purchase option at the end of the term.

  • Renting

    The asset (e.g., car) remains the property of the lessor and is covered against all risks. There is typically no purchase option.

  • Bonds (Borrowings)

    Spreading the required capital among private savers. The total debt is the loan, and each piece is a bond. Key considerations include: face value, interest rate, issue price, maturity, and redemption price.

  • Equity Capital

    Issuing new shares to be acquired by existing or new partners.

Bonds vs. Shares: Key Differences

  • Performance: Bonds offer a known return in advance, independent of the company’s profit margin. Shares’ performance depends on the company’s profitability.
  • Repayment: Bonds are repaid at maturity. Shares are only repaid when the company is liquidated.
  • Risk: Bondholders may face risk in case of company bankruptcy or insolvency. Shareholder action depends on the fate of the company, generally entailing a higher operational risk.
  • Rights: Shares provide rights to participate in the management of the business, whereas debt securities (bonds) typically do not.

Self-Financing (Internal Financing)

Capital generated and retained within the enterprise.

Classes of Self-Financing:

  • Maintenance

    An amortization fund used to replace fixed assets as they are used, thereby maintaining the company’s existing structure.

    • The estimated amortization fund offsets the loss of value of fixed assets.
    • Causes of Depreciation:
      • Physical depreciation (age or time)
      • Functional depreciation (due to use)
      • Economic or technological obsolescence
  • Enrichment

    Reserves consisting of retained earnings (net income not distributed to partners) used to expand the company’s economic structure.

    • Types of Reserves:
      • Legal Reserve (compulsory)
      • Statutory Reserve
      • Voluntary Reserves

Benefits of Self-Financing:

  • Greater autonomy and stability for the firm.
  • Positive fiscal impact (potential tax savings and cuts).
  • Often a unique resource for small and medium enterprises.
  • Stimulates investment as benefits are not shared externally.

Disadvantages of Self-Financing:

  • Investments made with self-financing can sometimes lead to unprofitable outcomes.
  • Potential for conflicts between owners and managers regarding the use of retained earnings.