Company Financing Sources
Sources of Company Financing
Are the liquid assets or means of payment available to the company to meet its cash needs. Can be classified according to three criteria:
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According to the Repayment of the financing source:
- Short term (less than 1 year)
- Long term (over 1 year)
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According to whether they have an external origin or have been
internally generated by its activities:
- Internal funding: retained earnings (reserves) and depreciation and provisions.
- External funding: Capital, loans, credits.
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Depending on whether the financial resources belong to the company or
outside the company:
- Means of self-financing: capital and reserves
- Means of external financing: loans, credits and loans either short or long term.
A. Own Resources and Own Funds
The equity capital is formed by the reserves and depreciation and provisions. The reserves, depreciations and provisions are generated by the company’s activity and form what is called self-financing or internal financing.
- Capital: formed by contributions from partners in the constitution or for capital expansion.
- Reservations: are benefits not distributed by the company from the results. Three types: legal, voluntary and statutory. It also supports self-enrichment.
- Depreciation: on fixed assets losing value in the production process: either physical wear or obsolescence.
- Provisions: part of the outcome that the company formed a fund to cope with certain future losses or expenses. For example: compensation or pay taxes, etc. * The depreciation and maintenance provisions are self-financing.
- Dividend: is the fraction of a business or company that is recognized by partners as a periodic payment of capital that is invested.
B. Long Term External Financial Resources
Are those for which the company has a period exceeding the duration of an economic exercise and, once past this term, you must return the corresponding interests.
- Loans (L/T): firms to banks, savings banks, credit unions in order to finance themselves.
- Loans: credit titles (bonds, promissory notes) that broadcast companies and are purchased by individuals or other companies.
- Leasing: system, through which the company incorporates some element of fixed assets in exchange for a lease. Main drawback: huge cost involved. Possibility to order.
- Renting: is the rental of movable properties in the medium and long term. The leasing company carries out maintenance. There is no possibility of buying at the end.
C. Short Term External Resources
These loans with a repayment period of less than one year are generally used for the cycle of exploitation:
- Loan (C/T)
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Bank loans (C/T):
- Overdraft: consist in using an amount greater than the available balance of a checking account.
- Account credit: is the fact that the company signed a contract with a financial institution and this makes available a current account with a limit of money and then pay for the interests that have used.
- Commercial loans: auto financing can get you when you leave the company due to suppliers making purchases.
- Discount effects: is transferred to a bank debts coefficients documented in letters before maturity.
- Factoring: is a form of financing that is the sale of all rights of credit to customers (invoices, letters) to a company called factor, which provides immediate liquidity to the company, besides the company did not respond to any unpaid or delinquent. Disadvantages: high cost of interest and fees.
- Spontaneous Financing: are those that do not need prior negotiation. For example (the money you owe the finance company or the workers already paid a month).