Medium and Long-Term External Financing Options for Businesses
Medium and Long-Term External Financing
A) Loans to Medium and Long Term
The most common forms of debt to medium and long term are bank loans and debentures.
B) Bonds
Loans are divided into many aliquots that are called debentures, bonds, etc. These are receivable in multiple installments by creditors. Large companies sometimes need huge funds, and it is not easy to find financial institutions willing to provide them. Therefore, they could raise funds by dividing these amounts into more titles for small private investors.
Concepts on loan:
- Face value: Of a title, the amount on which their interests revolve.
- Issue price: Amount to be paid for the title by the person who acquires it.
- Issue premium: Issue price minus the face value. A negative value is called an issue discount.
- Redemption price: The amount that is paid to the owner at the time of amortization.
- Redemption premium: Redemption price minus the face value.
- Indexed bonds: Titles in which the price, interest, or reimbursement depends on a price index.
C) Capital Increases
In economic societies, capital is divided into shares. In this case, capital increases are held by issuing shares, and partners are called shareholders. When bonus shares are delivered to shareholders through an extension, this does not produce any benefit.
To protect existing shareholders, there are two procedures:
- Issue shares above par (at an issue price higher than face value).
- Pre-emption rights (preference is given to existing shareholders to subscribe to new shares). To determine whether or not to acquire or sell subscription rights, the theoretical value must be determined.
D = (P0 – P1) / (N / M) + 1
- D = Theoretical value
- P0 = Summary for each old share
- P1 = Issue price of each new share
- N = Number of old shares
- M = Number of new shares
Differences Between Bonds and Shares
- Bonds: Are debt. Bondholders are creditors of the company, should pay interest, and have a maturity.
- Shares: These are titles of ownership of the company. Shareholders are business partners, are paid dividends, and have no expiration.
Leasing
A lease contract whereby a lessor manufactures or guarantees to a user or lessee the use of property in exchange for rent that the latter must pay for a period of time. It depends on the type of leasing.
Types of Leasing
- Operating Lease: Lease with an option to buy for which the landlord gives the tenant the fixed and limited use of goods on payment of periodic interest. The landlord is responsible for the proper functioning of the asset.
- Financial Lease: Contract lease with an option to buy in which a leasing company, following the instructions of the user, agrees to make available the good they wish on payment of a rental period for a time that often coincides with the duration of the economic asset. The basic difference in rates of the operational leasing is that it aims to provide a service, and finance is a financing technique.
International Financing: Self-Financing
This consists of the benefits that have been gained over time and that have not been spread, but have been retained for the growth of its economic capacity.
Types of Self-Financing
- Maintenance: Formed by the benefits that are retained. These are accumulated depreciation and provisions.
- Enrichment: Made up of retained earnings to undertake new investments. These are stocks.
Advantages of Self-Financing: No increase in expenses or bank commissions.
Disadvantages of Self-Financing: It can lead to unprofitable investments relative to others that are rejected due to not having sufficient resources.
Leverage
When a company has a significant portion of its assets financed with borrowed resources, it therefore has annual expenditure from one year to another.
Net Profit = Gross Profit – Interest