Business Funding & Financing: A Comprehensive Guide
Business Functions
Financial Planning
Determine future capital needs and financing for investments.
Investment Decisions
Identify the most profitable use of financial resources.
Obtaining Funding
Explore the best ways to acquire necessary funds.
Controlling Financial Stability
Assess debt levels and ensure the company’s ability to meet its financial obligations.
Classification of Funding Sources
By Ownership of Resources
- Own: Capital and owner’s reserves.
- Others: Loans.
By Length of Stay
- Long-term financial resources: Non-current liabilities.
- Short-term financial resources: Current liabilities.
By Origin
- Internal financing: Reserves.
- External funding: Equity from owners and partners, and others.
It is recommended that debts do not exceed 50% of total resources and that external funding does not surpass the capital.
Shares
Shares are securities representing ownership in a company. The buyer of shares becomes a shareholder, owning a portion of the company proportional to the number of shares held.
Shareholder Rights
- Dividend distribution.
- Preferential subscription rights for capital increases.
- Access to administrative information and voting rights.
- Participation in the assets upon liquidation of the company.
Company Constitution
The initial capital doesn’t need to be entirely from partners. A company can be established with a minimum payout of 25% of capital, with the rest as debt to shareholders.
Share Valuation
Nominal Value (NV): Value assigned upon issuance. NV = Equity / Number of shares
Theoretical Value (TV): Equity participation. TV = PN (Capital + Reserves) / Number of shares. Remember to update NV and the number of shares when issuing new shares.
Market Value: Price paid on the stock exchange. Quote = Market Capitalization / Number of shares.
Self-Financing
Self-financing utilizes retained earnings to fund expansion or maintain operations. These are company funds obtained without borrowing or requesting increased capital from partners.
Enrichment
Retained earnings as reserves:
- Legal Reserves: Mandatory by law, minimum 10% of profits until reaching 20% of capital.
- Statutory Reserves: Established by agreements outlined in the company’s articles of association.
- Voluntary Reserves: Formed by voluntary agreement of the partners.
Maintenance
Allocations for equipment depreciation or anticipation of future costs and risks.
Depreciation
Quantifying the cost of asset consumption over a specific period. (Affects both capital and provisions)
Advantages and Disadvantages of Self-Financing
Self-financing offers greater autonomy, financial independence, and improved solvency. It’s a primary source for SMEs. These resources don’t require remuneration. However, it can lead to unprofitable investments and conflicts between shareholder and director interests. Balancing reinvestment and shareholder returns is crucial.
Commercial Credit
Deferred payment acts as a loan from suppliers. The payment is postponed for a variable period (e.g., 30, 60, or 90 days). Conditions are typically pre-agreed and don’t require negotiation for each transaction. Interest may not apply, relying on established trust and solvency.
Bank Credits and Loans
Bank loans and credits provide immediate funds, repaid with interest. They often address cash flow discrepancies. Negotiation with the financial institution is required, potentially involving guarantees.
Loans: The full amount is received immediately, with interest paid on the total.
Credit Accounts: Funds are available as needed, with interest paid only on the used amount and duration.
Factoring
Factoring companies collect receivables on behalf of other businesses. Companies can sell their receivables (drafts or bills) before maturity to a factoring company for immediate cash, avoiding management fees and potential defaults. However, factoring involves high costs, including fees and interest.
Borrowing (Bonds)
Large enterprises needing substantial funds can issue bonds (or similar securities) in small denominations to the public. Investors become creditors, earning interest and receiving repayment at maturity (typically long-term, over five years). Investors profit from interest payments.
Bonds
A security representing a share of a company’s debt.
Incentives for Investors
- Interest Rates: The price of a loan, expressed as a percentage per annum.
- Issue Premium: Bonds offered below face value.
- Redemption Premium: Repayment above face value.
- Convertible Bonds: Can be converted into company shares.
- Participatory Bonds: Offer fixed interest plus profit participation.
- Indexed Bonds: Interest rates adjusted based on inflation.
Credits for Fixed Assets (SMEs)
SMEs have two options for financing long-term investments: medium/long-term loans or negotiating deferred payments with suppliers (formalized with bills of exchange).
Leasing
A lease agreement with an optional purchase at the end of the term (2-5 years). Allows companies to use assets without upfront capital or credit. Cannot be unilaterally terminated.
Financial Leasing
A leasing company purchases the asset and leases it to the company, which pays rent throughout the contract.
Operational Leasing
The manufacturer/distributor leases the asset, handles maintenance and renewal, and allows contract termination. High cost but transfers obsolescence risk, suitable for industries with rapid technological change and high profitability.