Business Finance: Funding, Investment, and Leasing
Understanding Corporate Finance and Investment
Own Means of Financing
Own means of financing refers to the financial resources owned by the company. These resources include:
- Capital: Provided by partners or owners of the company.
- Reserves: Profits retained by the company and not distributed, used to cover financial needs.
When a company reinvests profits into itself, it is engaging in self-financing.
External Means of Financing
External means of financing are the set of external resources that generate a debt or obligation for the company. These resources come from creditors and financial institutions and must be returned within a specified period.
Sources of Financing
- Short-Term Financing: Repayment period is less than one year.
- Long-Term Financing: Repayment period is more than one year, or the period is indefinite.
Investment
To carry out its activities, a company requires various factors of production. Manufacturing new products necessitates the acquisition of machinery, buildings, transportation, raw materials, labor, and energy. The company obtains the necessary capital resources from the capital market.
Characteristics of an Investment
- Expenses: The amount paid when acquiring assets (Time 0), usually the highest payment. In a cash investment, this is the only payment.
- Duration of Investment: The number of years during which cash inflows and outflows occur due to the investment project.
- Net Cash Flows: The difference between receipts and payments the company incurs throughout the investment period. Financial costs arising from investments are *not* included in payments.
Factoring
Factoring is a form of corporate financing where a company sells its accounts receivable (customer credit rights) to a factoring company. The factor is then responsible for collecting the debts. This provides immediate liquidity, eliminates collection management, and transfers the risk of default to the factoring company. The drawback is the high cost, including commissions to cover default risk and interest for advancing the funds.
Spontaneous Financial Funds
Spontaneous financial funds are those that do not require prior negotiation.
Leasing
When companies need new equipment, they can either purchase it or lease it through a leasing operation. Leasing is a rental agreement where the lessor leases an asset to the company, which agrees to pay leasing fees. Leasing is a form of medium and long-term financing, allowing the use of assets without requiring equity or credit. The drawback is a potentially high cost. Advantages include avoiding the need to find financial resources for asset acquisition and obtaining tax benefits.
Renting
Renting is a modality involving the rental of movable assets in the medium and long term. In a renting contract, the lessee agrees to pay a fixed monthly income for a specified period, and the leasing company provides a range of services.